Support For Commodities Erodes As The Dollar Rallies

Commodity markets continue to be weighed down by worries over Greece and Spain. Risk appetite is much reduced as investors are looking towards secure government bonds and the dollar for safety. German 5-year debt has reached a record low of 0.41 percent while the euro is trading at a two-year low. The strengthening dollar is however the main worry for commodity investors as it continues to sap support from the sector with the broad based DJ-UBS commodity index currently trading at the lowest level since September 2010, having lost seven percent during the last month alone.

During the same time the dollar has rallied 5 percent against a basket of currencies and the impact has been quite profound with less than a handful of commodities managing a positive return during May. The dollar is currently overbought against several currencies using the RSI as an indicator. While this may slow its further progress we probably have to wait for the result of the Greek election on June 17 as the uncertainty about the future of Europe will most likely prevent these markets from recovering much before then.

Gold is stuck between critical support at 1,520 and resistance at 1,600. Investment demand for gold has picked up slightly with recent data from the CFTC seeing a small increase in net long futures positions while the demand for ETP has picked up again following strong outflows last week. Physical demand however remains depressed with India, the world’s biggest buyer, struggling with a very weak rupee.

Crude oil has been drifting lower as the outlook for global demand hangs in the balance following signs of a slowdown in China and especially in India where retail prices have been raised in order to ease the pressure on government finances. The speculative overhang of net long positions, although much reduced, still persists and could pressurize prices further. Supply concerns related to the dispute between the West and Tehran over its nuclear intentions have been pushed down the agenda but could easily move up again which all in all should ensure some sideways action in the near-term.

Industrial metals are on track to record the third worst monthly performance since the sector began to recover from its 2008 low. The London Metals Index is currently down 8 percent on the month with copper, tin and lead having record double digit losses. Focus remains squarely on the fear of diminishing demand and the strengthening dollar with signs that current prices are having an adverse impact on mine production so far not having had much of an impact. With copper supply set to decrease over the coming year prices are likely to rise again but not before we see signs of the the European crisis stabilising.

Agriculture remains the worst performing sector this month as major losses have been recorded amongst some of the major crops with only livestock futures and Robusta coffee bucking the trend. We are now into the important months where crop yields will be determined and as such the outcome is very much at the mercy of weather developments during this period.  Corn has been the worst performer of the major crops as a record speed of planting and favourable weather so far has seen new crops underperform wheat by a considerable margin.