Metals feel the Ukrainian heat
The destiny of the UAE is tightly intertwined with commodities and their prices, and this is because Abu Dhabi is a primary oil exporter, while Dubai is a trade hub for gold, oil and several other commodities, says a note from chief investment officer at Dubai’s Emirates NBD.
Arjuna Mahendran says: “The year 2014 has seen a strong start – copper being a big exception – for commodities in general: gold and palladium are up low double-digits, crude WTI and sugar are marginally higher, while coffee shot up 56 per cent on the back of the Brazilian drought. The reason for this varies from rising geo-political tensions in Ukraine to weather-related concerns on some agricultural products.
“Commodities prices were supported earlier this year by bad weather in the United States, a spike in Chinese imports in January, Ukraine-related geopolitical risks and long-commodity speculative-positioning which reached a record level for the month of February 2014.
“While copper is likely to rebound from quite oversold levels, we do not see recent uptrends continuing for long. China industrial activity deteriorated in early 2014 and this raises uncertainty about further possible weakness in domestic demand, which would hit oil – and copper further – primarily,” says Mahendran, adding a seasonal rebound in Chinese leading indicators following the Lunar New year is a possibility, “we do not anticipate this to be the start of an uptrend”.
The CIO says: “Gold edged closer to $1,400 on Ukraine-related tensions, which should abate eventually. Sanctions are being administered on Russia but are unlikely to be far-reaching as countries like Germany balk at losing their lucrative trading links with Russia.
“Also, the strengthening US economy – and along with it rising real interest rates – should force gold bulls to capitulate and push prices lower as the US Federal Reserve bank keeps reducing its money-printing exercise.
“We remain bullish on palladium and platinum fundamentals, driven by healthy trends in the auto industry. We see platinum currently supported as well by the challenges witnessed by the South African mining industry and palladium by the threat of sanctions on Russia. Russia and South Africa are the two biggest producers of these metals.
“Our investors have profited from the Palladium Sharkfin structured note, one-year tenor, whereby the client gets the benefit of the full upside, provided palladium never touches 130 per cent of the spot price at issuance. If the barrier is touched the client gets the benefit of a three per cent coupon and loses upside participation, whereas in case palladium records any kind of loss, full capital protection kicks in.”
Talking about the global picture, Mahendran says: “Commodities looks mixed for the next few months, as global growth does not seem to be strong enough in the coming quarter to support recent uptrends, trading opportunities are plentiful.
“We summarize in the following table our key trade recommendations thus far for 2014 to highlight how we trade price ranges for gold, platinum and palladium,” he concludes.