Commodities still strong in the mid-term

Written by Joy Lee
Monday, 19 October 2009 11:25

KUALA LUMPUR: Commodities could continue to extend gains as investors’ money pour in on the back of a weakening US dollar, but the anticipated upward trend may meet a slight bump in the near term as the dollar could snap back up from short covering.

“The dollar is extremely oversold at the moment as investors have been very bearish about it. This builds up potential demand when investors realise that they are short on the dollar and start short covering their position in about a month’s time,” Jupiter Securities Sdn Bhd head of research Pong Teng Siew told The Edge Financial Daily.

He said short covering of the dollar could see the currency gaining about 3% to 5%.

The Dollar Index, which measures the greenback’s value against six other major currencies, has been declining since February. It touched a 52-week low of 75.481 points on Oct 14. As at 7pm last Friday, it added 0.122 points to 75.604 points.

Commodities have risen broadly since March this year as a result of the dollar’s continued decline.

Year to-date (YTD), crude oil has gained about 73%, crude palm oil (CPO) 43%, aluminium over 20% while copper has doubled. Gold has gained 19% year to-date. It hit an all-time high of US$1,070.80 last week (RM3,619.30).

Pong noted that the fundamentals of the dollar had improved on the back of an improving US trade current account from a year ago.

“But the weakening of the dollar is partly due to declining demand for the dollar as a reserve currency for central banks. In August, demand dropped about 30%,” he said.





Although the dollar may rise in a month’s time, obstructing the gains in commodities, Pong said the outlook for commodities in the medium term remained strong.

“The dollar has been declining the last four to five years. It strengthened last year due to deleveraging and there was a shortage of dollar. But after the panic was over, the dollar dropped again and has been declining since.

“The short covering in the near term will not last long and once it is over, the dollar will resume its decline. So, commodities still remain strong in the medium term,” he said.

Crude oil shed 38 cents to US$77.20 a barrel at 7pm last Friday as the dollar gained marginally while gold spot slipped 0.2% to US$1,047.73 an ounce.

Meanwhile, January delivery for CPO added RM67 or 3.2% to RM2,178 a tonne and three-month delivery for copper and aluminium added US$69 and US$11 to US$6,289 and US$1,916 a tonne, respectively.

However, analysts cautioned that the rise in commodities could be capped by fundamentals for specific commodities.

Pong said demand for industrial metals would continue to be supported by demand from China for raw materials. He expected prices of metals to continue climbing as there was a capacity constraint in the global market and supply may not be able to meet demand, thus pushing prices further.

He added that crude oil stockpile was high. Nevertheless, prices are largely affected by futures prices, which are speculative, and could force the price upwards in the spot market.

“Crude oil has gone up progressively over the year rather than a spike. I don’t think it will touch US$100 per barrel this year. The range of US$60 to US$70 is reasonable.

“The stabilisation of crude oil at this level has increased investors’ confidence to invest in more oil and gas projects,” Jason Yap, an analyst at OSK Research, said. He added that crude oil could average between US$70 and US$80 a barrel in the fourth quarter and remain near that range next year.

The higher crude oil price has failed to lift CPO.

“Technically, CPO attempted to test the RM2,200 level last week but failed. The pick-up in production from Malaysia and Indonesia is weighing down on CPO so the strengthening of crude oil has little affect on CPO now,” a palm oil trader said.

She added that CPO could probably go up if hedge funds came into the picture, but that seemed unlikely at the moment. Furthermore, China has not been buying of late and would only start stocking up come the festive season next year.


This article appeared in The Edge Financial Daily, October 19, 2009.