Economic gloom and financial turmoil will dominate the mood in commodity markets over the next week, despite efforts by major central banks to relieve the money market crisis. Some commodities may see dramatic price swings as traders tidy up their portfolios or stay out of the market before the end of the year and as several futures contracts expire.
"Waves of nervousness are going through the market," said Frances Hudson, strategic investment director at Standard Life Investments. As a hedge against financial uncertainty, gold should find some support but industrial metals such as copper could see further losses due to fresh signs that the global economy may be deteriorating.
However, robust demand for agricultural products and worries about supply shortages will help buttress grains and oil prices against any panic sell-offs. Commodity markets are on alert for signs of damage to global demand for natural resources. They are feeling a cold wind from credit markets and are worried about the possibility of recession in the United States, the world's largest economy.
Interest rate cuts by major central banks including the US Federal Reserve and the Bank of England have done little to ease anxieties and an attempt to stop the rot with large injections of money this week only briefly boosted confidence.
"The measures are too little and to late. But I do expect US central bankers to do everything they can to keep the good ship America afloat," said David Murrin, chief investment officer at Emergent Asset Management.
"In 2008 I would expect interest rates to move back to 2003 levels, and a sequence of apparently innovative measures that arrive too late to prevent recession/depression taking hold in the United States." US rates hit a historic low of just 1 percent in June 2003.
"PEOPLE NEED TO EAT":
Uncertainly creates volatility and risk aversion, one reason why gold hit a 28-year high of $845.40 a troy ounce in November. On Friday afternoon, it traded at $791 an ounce.
"Precious metals investors are quiet observers of the spectacle," said Markus Bachmann a fund manager at Craton Capital. "There might be no final curtain for some time to come, but the upcoming acts could be conducive to our taste in music."
A weaker US currency-which makes gold cheaper for holders of other currencies-would also help boost prices next week if data on US economic growth, the housing market and personal consumption and expenditure disappoint.
That data could also be important for base metals where the benchmark copper contract at around $6,500 a tonne in London has lost more than 20 percent since early October. "If you get slowing economic activity then demand for industrial metals eases," Hudson said.
That effect could be compounded if economic growth in China eases, she said. "Emerging markets have not completely decoupled from the United States."
Analysts expect oil prices at above $90 a barrel to be reinforced by robust demand and supply concerns after a decision on December 5 by the Organisation of the Petroleum Exporting Countries (OPEC) not to increase oil production.
Agricultural product prices such as grains are churning higher. European wheat prices, at around 261 euros a tonne, are gaining ground as markets focus on poor crops and higher demand from a more affluent population in emerging countries.
"Agricultural commodities are just going higher and higher and higher," said Edward Hands, a senior portfolio manager at Commerzbank Alternative Investments.
"The supply/demand dynamics are so strong that investors, producers and consumers are almost immune to what's going on with credit markets-people still need to eat and there's less and less food around in the world."
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