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Monday, August 24, 2015

Crude Oil, Copper, Gold indicate that slowdown is not yet over...

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There is no clarity yet on whether economic growth will revive

It is that time for the global markets when all eyes are trained on the world of commodities. It provides the surest way to understand which way the markets will turn over the months ahead.

The law of gravity has gripped crude oil for the past few months, where traders are closely watching the economic indicators coming from China. With the pace of economic activity slowing down sharply, crude oil traders are expecting demand to slow down in the world’s second largest economy.

With nearly 11 million barrels per day, China is the second largest consumer of crude oil in the world. That is about 12 per cent of the daily global consumption of around 87 million barrels per day. When the second largest consumer goes slow on the consumption of your produce, it is time, as some countries will soon realise, to press the panic button.

Russia’s stock markets are driven by the performance of its oil industry. As the largest exporter of crude oil outside of the OPEC nations, its foreign exchange earnings are dependent on crude oil exports. With oil prices in a tailspin, its policymakers have a lot to worry about.

The price of copper is often considered as a benchmark of the health of the global economy. Because of the widespread industrial use of the red metal, the trend of its prices is closely watched, along with others, by market analysts and economists.

Spot prices for copper have corrected nearly 20 per cent from the recent high seen during May 2015. Its spot prices over the last one year have fallen over 30 per cent. Copper stocked in warehouses (awaiting demand from customers), during the last one year, according to data from the London Metal Exchange, is at its highest level. The warehouse stocks is at its level seen during the end of 2013.

The message is clear – factories that drive demand for the best know industrial metal are just not seeing enough demand.

Gold is perhaps the most widely tracked commodity in the world and its price movements are very closely watched. Its prices have been on a declining trend since May 2015. But during the current month, with all the pessimism being driven because of the weak global economic indicators, its prices have seen a sharp reversal. Its market prices, tracked on India’s commodity exchange, has risen about 12 per cent. More money is now being used to buy gold, seen as a safe haven for investments during times of uncertainty.

The devaluation of the yuan has the potential to trigger a currency war, particularly among export focused countries. However, if the Federal Reserve does raise interest rates for the first time after over six years, it could spell trouble for gold.

The global economy is on the proverbial tenterhooks. It is an interesting time if you are an avid stock market watcher.

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