By Bitupan Majumdar
Silver prices may see further declines to levels around $25 -$23 on contraction of industrial sector. Almost 80% of Silver is used for industrial purpose while only 15% is for investment demand. Gold prices are likely to see small correction on fear of a banking crisis in the Euro zone that may cause liquidity crunch. However, gold remains attractive for long term investment.
Owing to weak demand outlook due to global economic slowdown, metals and energy prices may come under pressure. Copper which is trading far above its marginal cost of production may prone to further declines such as $6500 to $6000 per tons October. Nickel is likely to remain depressed on slowing consumption of stain less steel in China. Zinc which is expected to last the surplus trend till 2012 may remain depressed in the short term. Bank financing deals which hold almost 60% of Zinc stored in LME warehouse may not attribute any major support when panic grips the market.
It was another month of selling in markets where almost all asset classes were under pressure. Commodities plunged across the board on Greece Default fear which is likely to cause a banking crisis in France, Germany and Italy. Three major global financial powerhouse BNP paribus, Societie General and Commerzbank are holding estimates $14.5 billion of Greece sovereign debt. Italy’s largest insurance company Generali is holding almost $4 billion. Apart from that, holdings by IMF, European Union Loans, Eurosystem SMP and European Central bank are estimated around $150 billion.
The political rift between Euro zone member countries to provide additional loan to Greece is subjected to major concern which has pulled down all major asset classes globally along with high yielding currencies. The interest rate on Greek three-year government debt recently soared past 100% and the yield on 10-year bonds reached 22%. The Hellenic government needs to escape from it an otherwise it will be an impossible situation. Its debt is 150 % of GDP, rising by 10 % this year. GDP falling by more than 7% this year, pushing the unemployment rate up to 16%. The balance-of-payments deficit is around 8 % of GDP and banks are rapidly losing deposits. The only way out is the country to default on its sovereign debt. It must write down the principal value of that debt by at least 50%.
The current plan to reduce the present value of privately held bonds by 20% is just a first small step towards this outcome. On Greece default, pressure will mount on other PIIGS nations i.e. Portugal, Italy, Ireland and Spain. It may push up sovereign yield of these countries and in such a scenario Portugal; Ireland will have to go for assistance from EU-IMF.
EU fear lead sells off in commodities. Gold regarded as a safe haven saw panic selling and long liquidation with prices falling almost $400 from the historic high. Silver prices shed 25% in just two days, base metals continued to fall with Copper leading the row now.
Its seems nothing is right to place a bet on buy side as the world is heading towards a double dip recession. The “V” shaped recovery is fading out – the recent slowdown in manufacturing and services in Europe, US and China shows we are heading towards a 2008 kind situation or may be worse. The depth is still unknown but a series of default by south European Nations may make the situation worse than the last decade recession.
Apart from Euro zone, a slowdown in the Chinese economy and recession in the US may result in slowdown of demand for crude oil and industrial metals. US economy is no doubt is heading towards a double dip and may confirm by Q1 2012.
The Chinese economy which has been a major contributor for global economic recovery after the sub –prime crisis is also slowing down. As per a poll conducted by Bloomberg, market believes that Chinese economic growth may drop below 5% by 2016. China, which saw its exports tumble the most since at least 1979 amid the 2008-09 global crisis may not be able to rely on trade in any prolonged demand slump in Europe and the U.S, a recently released data showed, China's factory sector contracted for a third consecutive month in September as flagging overseas demand put the brakes on new orders.
The HSBC flash Purchasing Managers' Index dipped to 49.4 in September from August's final reading of 49.9 and hovered below the 50-point mark for the third straight month. China's industry sector, which includes manufacturing and resource exploration, accounts for about 40% of the country's GDP.
(The author is Senior Research Analyst, Commodities and Currencies, JRG Securities Limited)
