Only a correction

Commodity markets witnessed a meltdown last week. The sharpest decline was seen in the metals sector, which, interestingly enough, had also seen the sharpest rise in past months and had peaked in May. In fact, the recent buoyancy in prices of precious and base metals lasted far longer than any similar boom in the past half century. The most striking aspect of the recent price trend is that it is truly global in nature, cutting across commodities and regions. India also was not unaffected by this trend. Indeed, bullion prices have nose-dived some 22 per cent from the 25-year peak, which was reached about a month ago. Gold has dropped below $600 a troy ounce for the first time since April. Displaying a similar trend, yellow metal prices in India have been on the decline even though the country continues to be the world's largest consumer of gold. The August delivery price for gold in the Multi-Commodity Exchange in Mumbai ranged around Rs 8,400 per 10 gm, after touching the Rs 10,000-mark in the spot market recently. Silver has been the biggest loser in the precious metals segment, having shed over a third of its market value in the past one month. The base metals, too, have not been spared by this downturn and have tended to fall below their key support levels. Copper, for instance, has touched its lowest level in about two months to rule at about 25 per cent below its record high touched on the London Metal Exchange (LME) last month.

What needs to be noted here is that it is not a mere coincidence that the securities and commodities markets are moving in tandem. Indeed, some common factors are dictating these swings. These include the hike in interest rates in the past couple of weeks in several countries, including India, and the signs of the dollar gaining some strength. While the former has squeezed liquidity, the latter has made investment in commodities less attractive. Institutional investors in the stock markets, which had made commodities a significant part of their investment portfolios, have begun pulling out of both, triggering the downturn in prices. The underlying factor here is that the supply-demand equation no longer remains the prime driving force behind the prices of most commodities. The liquid money of investors has been doing the rounds in the commodities markets, especially the futures segment, to hedge the investment risks against geo-political and economic concerns. Moreover, the growth trends in key economies also influence the capital and commodities markets. No wonder then that the price crash on the LME was sparked off by fears of a slowdown of the US economy.

Notwithstanding all this, it can be argued that the current downturn in the metals market is a correction that usually follows a sharp rise in prices. But, what can also be argued is that the Indian markets have perhaps over-reacted to the global trends and that these may soon start seeking their own levels. The overall fundamentals of the commodity-based industries in India remain strong and prices cannot remain depressed for long. In fact, the same is true in many other key economies, notably that of China. That is perhaps why in spite of the fall, metal prices are still ruling higher than their levels in January last, when the boom began.