Commodity Markets: Copper Crash Hurts Commodity Investors, But Gold Still Looks Strong

Gold retreated from the highest level in 12 weeks on Wednesday as plunging commodity prices provoked investors to abandon their gold positions to cover losses elsewhere. On the Comex division of the New York Mercantile Exchange, gold futures for February delivery lost 0.4 percent to $1,229.90 an ounce, stretching out a recent run of good fortune. The metal recently marked $1,244.60, the highest since Oct. 23, on speculation that Greece will leave the euro, inreasing the precious metal’s demand as a haven asset.

Bullion is “benefiting from risk aversion in other markets on global growth concerns,” Li Zibo, an analyst at Beijing Capital Futures Co., wrote in a note. “Further out, we still believe that a stronger dollar driven by differentiation in U.S. and Europe monetary policies will put gold on the defensive.”

Other Metals

Silver futures for March delivery dropped 52.6 cents or 3.07% to reach at $16.63 a troy ounce on the Comex in New York. Platinum and Palladium both halted their declines.

Copper Crash

Elsewhere in metals trading, copper prices saw their largest single-day loss in over three years Wednesday, pointing to escalating doubts among investors about the health of the world economy.

The much of Wednesday’s selloff appeared during Asian trading hours after the World Bank raised worries about a “disorderly slowdown” in China and reduced its forecast for global growth in 2015.

The risk factors mentioned in the World Bank’s report put heavy selling pressure on copper because the metal has widespread applications in most sectors of the economy ranging from smartphones to automobiles, making it a popular indicator for economic trends and markets. China is of greater significance in the market because it is the biggest copper consumer. Even a slight drop in Chinese demand can have greater impact, dragging down prices.

“The key might be in the second half, when we see whether the Chinese property cycle recovers modestly or if it continues to slump. That will be a key determinant in terms of how big the copper surplus will be,” Xiao Fu, head of commodity markets strategy at Bank of China International, told Reuters.

Many investors seem worried that sinking copper prices are a sign of a higher-than-projected retard in China, the world’s second-largest economy. That combined with other factors such as the relentless decline in oil prices and the potential for a recession in Europe, has caused trouble for financial markets, leading a selloff in Wall Street this week and increasing demand for safehaven assets like Treasurys and gold.

“The dumping of copper is saying that the world economy is not on a stable footing,” said Ira Epstein, a broker at the Linn Group, a commodities-trading firm based in Chicago. “This is the sign of a global issue.”

“Commodities are going to be a big deal this year,” said Michael Gurka, founder and president of BruinHill Partners. “We’re going to have to ratchet our belts a bit tighter, but I think we’re about to hit a bottom.”

Copper market participants were already predicting a worldwide excess of the metal this year, the first since 2009 and the biggest since 2001. Production of refined copper across the world will surpass demand by 390,000 tons in 2015, the International Copper Study Group said in December.

The risk for a surplus has put downward pressure on prices for months, with futures losing 12% in the second half of 2014. However, the selling has gained speed this week, with investors avoiding copper in an effort to leave commodities driven by plunging oil prices.

After showing noteworthy losses on Monday and Tuesday, selling in Asia on Wednesday seems to have been led due in part to investors who opted to reduce their positions in the copper market to avoid more losses, traders said.

Copper for March delivery dropped almost 7.9% to hit intraday low of $2.434 a pound, the worst level since June 2009.

Iron Ore & Coal

Citigroup Inc. lowered its expectations for iron ore and coal in the wake of falling supply costs, signaling the energy rout is spreading to other commodities. Iron ore delivered to China’s Qingao port dropped 0.6 percent to extended three-day losing streak, closing at its lowest price since Dec. 26.

“Oversupply and falling demand are dragging down commodities beyond oil,” said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank Ltd. in Tokyo, which oversees $325 billion. “There are a lot of uncertainties and it’s hard to see a reversal in sentiment for the time being. As an investor it’s hard to proactively take on risk at the moment.”

Oil Rout

Meanwhile, oil prices extended losses on Wednesday to trade around the worst point in six years as enduring concerns over a excess in worldwide supplies drove down prices. London-traded Brent prices dropped 91 cents or 1.89% to move at $46.92 a barrel, while Nymex oil was down 62 cents or 1.36%, to finish the day at $45.27.

While the selloff is tend to increase the safe-haven demand of the precious metal, investors were ecnouraged toward selling profitable gold holdings to raise cash and cover losses elsewhere.

The World Bank reduced its 2015 estimate for worldwide growth to 3.0% as compared to prior forecast of 3.4% due to sluggish growth in the European countries, Japan and some major emerging economies. The agency also lowered its global growth forecast to 3.3% for next year from an earlier estimate of 3.5%

Oil and copper react aggressively to the economic growth outlook because of their uses across a wide swath of industries.

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