May has been the best month for the US dollar in 2008 against the major currencies. Crude oil prices were delinked from the US dollar and were unstoppable. Price of soft commodities like rice, wheat, soybean and maize seemed to have broken the gravitational force. India, Thailand, Vietnam had banned rice exports which resulted rice prices in CBOT zooming. Among the base metals Nickel was the worst performer while copper continued to generate positive returns. Managing inflation was the key motive was most global central banks (other than Federal Reserve)

Volatility in foreign exchange markets was very high as due to US interest rate expectations. At the beginning of May markets expected that Federal Reserve will pause in interest rate cuts. However towards the end of May, markets have fully factored in a US interest rate hike in December. Some of the US dollar optimists have even placed their bets on October interest rate hike by the Federal Reserve. Interest rate factor was one of the prime reason for the gains in US dollar.

Zinc and Lead initially gained after the earthquake in China. Thereafter they fell on (A) Lack of major Chinese demand (B) Global inventories to remain in surplus, even after production stoppages from china (C) No major mine worker strike in any major mines.

LME Copper (3 months) reached a new high of $8889.50 and fell thereafter fell to $7885 as Chinese buyers stayed away from buying the metal.

Spot gold traded in wider $845-$940 range. Day traders and weekly traders got goose bumps while trading. A few days of sharp rise was followed by an equally swift decline.

Silver (spot) traded in $1600-$1850 wider range. In our view silver offered less risky trade than gold in the month of May. Silver traded in a range. If one was able to detect the range, it would have become a happy hunting ground for him.

Natural gas for the first time in many years outwitted crude oil, although both were unstoppable.

OUTLOOK

June is a very important month for the US dollar and global equity markets. This is a make or break month for the US dollar. There will be days when the US dollar range trades and there will days when there will be exceptionally high volatility. Be prepared for a roller coaster ride in all speculative markets.

General factors

1. US Dollar and US economy: The US dollar and the US economy have been the key driver for global growth. The subprime crisis in 2007 and extension of the same in the first quarter of 2008 resulted in the US dollar getting ripped apart. Most of the negative news on the US economy has been factored in by the markets and is being reflected in the prevailing US dollar rates. If the US economy shags in June or economic numbers reflect more downside risk than upside risk, then one should expect another round of US dollar bashing and higher commodity prices.
2. Lagging effect of record high energy prices and record high food prices: It remains to be seen whether global growth gets affected by way of a further slowdown for the rest of 2008 due to high energy prices and food prices. If global GDP rates fall below 4.10% in 2008 then one should expect base metals to trade with a softer bias for the rest of the year. Higher prices of essentials take two to three months to have a material effect on consumption and savings. It’s only from August onwards that we will come to know the trickle down effect. We expect more negative news for the global economy over the next few months.
3. Growth Versus Inflation. Central banks Dilemma: Central banks perceive the current situation even more difficult to solve than the early 1970’s. Other than the Federal Reserve and the Bank of England most of the central banks want to curb inflation without reducing interest rates. The European Central bank (ECB) stance is hawkish on interest rates. Bank of Japan may cut the near zero interest rates by a quarter towards the close of the year if Japanese growth cools. Gold and precious metals will benefit on investment demand as a hedge.
4. Federal Reserve meeting: There is the Fed meeting towards the close of the month. Over the past few years predicting the outcome of the June Fed meeting is like playing a cat and mouse game as the US interest rate outlook can change even at the last moment. Traders bet on far dated interest rate futures so the far dated outlook on interest rates is more important than the short term outlook. The Federal Reserve’s outlook on the US economy will be the key.
5. US Presidential elections: Barrack Obama is almost certain to become the democrat nomination. The fight will be between Obama and McCain for the US president. Before the US voting in November we expect (a) the US dollar to gain as event risk will prevent traders from going too short (b) Oil prices to fall. We believe that there is a nexus between oil companies and hedge fund managers in the current oil price zoom. Hedge fund mangers will reduce their crude oil long positions before the election for McCain to have an outside chance to win. (c) US equity markets to rally on expectations that US economic growth will be on the higher side under the new president.
6. Health of global financial services sector:  In the first five months of 2008, the global financial services sector has deteoriated with more firing than hiring. Banking industry was the worst hit. More and more banks are forced to raise capital in order to maintain capital adequacy. If more news continues to pour in June then gold and other safe haven investment products will get the benefit.

Specific factors

 

Gold and Silver: Gold and silver needs some more investment demand to be in a short term bull run. If gold, silver fails to attract investment demand then there will be a short term bear phase which should be used as an investment opportunity. Crude oil prices will also be the key. Global physical demand will be on the higher side till $840. Below $840 physical demand will fall only to recover near $800.

 

In the past few years, silver has under performed gold in June to August period. There will be days when gold rises and silver falls and vice-versa. Traders should treat gold and silver separately. Direct correlation may not work.

 

 Base metals: Chinese demand will be the key for base metals. We expect a sharp increase in Chinese demand for all base metals till the summer Olympics in August. Nickel, Zinc and Lead should bottom out in June. These metals will give an excellent investment opportunity. The proposed Peru mine worker strikes from June 16, will also affect base metals prices in June. Copper, aluminum and tin will continue to find buyers on major declines.

 

Investment demand and mineworker strike will be the key for base metals in June. Electricity/power woes in major producing countries will affect mine output in June to October period.

 

Option traders should buy 2009 calls options in all base metals as the premiums are very cheap. We are very bullish in base metals in 2009.

 

Energies: Traders will be watching the crude oil run. One needs to watch for state intervention to cool energy prices in the short term. Markets will also be preparing for the US hurricane season which begins from July and ends in November.

 

COMEX GOLD AUGUST

 

 

• Neutral Zone
• Commodity Channel Index (CCI) below 100 suggests that gold will find sellers on major rise till it does not break $958.
• Gold has to hold 200 day MA of $846.80 (not there in the chart) on weekly closing basis to be in a bullish zone.  Gold will find buyers on dips as long as the 200 day MA holds.
• Key Supports: $846.80, $830.10 and $780.0
• Key Resistance: 941.10 and $960.30
• Medium term Trading strategy: One should wait and see if the $830-$850 zone holds. If gold holds this zone then one can invest for $945 and $1008. If gold falls below $830 then invest around $800 and $770. Invest in small quantities at the current prices only if you are able to take a risk of 10% to 15%, else wait for a bottom and then invest.
• Medium term outlook: Triple bottom around $845 which suggests that gold can target $932.20 and $957.60 and further to $1008.
•  Short Term Trading Strategy: Buy on dips as long as the $830-$850 zone holds.

COMEX SILVER JULY

 

 

 

• There are three upward waves and three downward waves formed in the past one year. In a bull market the length of the upward wave is more than the length of the downward wave.
• Now there is a gridlock between $1500 and $1600 which also coincides with the 200 day MA of $1569.20.  In June or till September if silver holds this zone on weekly closing basis then it will target $2150 and may be even $2480.
• If silver closes below $1500 (on weekly closing basis) there is an outside chance of testing 2007 low of $1106.
• Key Supports: $1606 and $1569.
• Key Resistance: $1759.50 and $1930
• Medium term outlook: Silver targets $1832 and $2100, as long as $1606 and $1569 holds on daily closing basis.
• Short Term Trading Strategy: Short term traders buy silver on dips as long as $1606 and 1556 hold’s on closing basis.
• Medium Term Trading Strategy: Invest in small quantities at the current prices only if you are able to take a risk of 10% to 15%, else wait for a bottom and then invest.

COMEX COPPER JULY

 

 

• Momentum Oscillators have to be positive for another test of $404.
• The rise to $426 has been ignored for technical analysis as the UK markets were closed. If the rise to $426 is included for technical purposes, then we will get a skewed outlook.
• Key support: $348.80
• Key Resistance: $392.10.
• Short Term Trading Strategy: Short term traders buy on dips as long as $347 holds on weekly closing basis. But book profits around till $382 is not broken. Alternately one should use a sell on the rise sharp strategy till $384 and $406 is not broken.
• Medium Term Trading Strategy: Remain on the sidelines and buy around $347 and $310.

CRUDE OIL JULY

 

 

• If crude oil does not break $135 in June then it will fall to $119.13 and $110.0.
• Only a close over $135 for two consecutive days will result in $144 and $152.60.
• RSI is in a neutral zone while momentum oscillators suggest bullish zone.
• Key Support: $119.13 & $116.20
• Key Resistance: $135.10 and $144.80
• Short Term Trading Strategy: Short term traders buy crude oil on dips as long it holds $120.
•  Medium Term Trading Strategy: Wait for a correction and then invest around $116.10 and $104.80

 

Disclaimer: Any opinions as to the commentary, market information, and future direction of prices of specific currencies, metals and commodities reflect the views of the individual analyst, In no event shall Insignia Consultants or its employees  have any liability for any losses incurred in connection with any decision made, action or inaction taken by any party in reliance upon the information provided in this material; or in any delays, inaccuracies, errors in, or omissions of Information. Nothing in this article is, or should be construed as, investment advice.Prepared By Chintan Karnani. Website www.insigniaconsultants.in

-- Posted Monday, 2 June 2008 | Digg This Article | Source: GoldSeek.com

1080-81, Ugger Sen Street,”Somani Bhawan”
Sita Ram Bazar, New Delhi-110006. India.
Ph: [O] 91-11-30919880 [M] 09811139549
Website: www.insigniaindia.com
Email: chintan@insigniaindia.com

Previous Articles by Chintan Karnani, Insignia Consultants