Charts Of The Day: On A Knife-Edge

Several commodity markets could be on the cusp of significant near-term moves. First, our expectation for consolidation in industrial commodity prices over the coming weeks is being challenged by a deteriorating technical picture. Second, in line with a weakening outlook for precious metal prices, silver prices look precarious.

Industrial Commodities On The Ropes

Bellwether markets such as copper and oil are trading below key levels of support at the time of writing and poor weekly closes would suggest that the recent correction has further to run in the coming weeks. Three-month LME copper is flirting with 12-month trendline support that comes in around US$7,780/tonne and a decisive break below that level would bring longer-term support around US$7,200/tonne into focus. Similarly, Brent is testing key support at US$111/bbl and a move below this level would see us target additional short-term losses.

Heavy Metal
Three-Month LME Copper, US$/tonne (Weekly Chart)

After sharp declines by industrial metal and oil prices at the end of February, we had expected a consolidation in the coming weeks. Underlying fundamentals should remain supportive in H113 as global industrial production continues to rebound, aided by a temporary pick up in China. However, weaker than expected official and HSBC China PMI readings for January have undermined market confidence in the country's economic recovery and prices look at risk of additional near-term losses.

Losing Steam
Front-Month Brent Crude, US$/bbl (Weekly Chart)

While the degree of weakness in industrial commodity prices since mid-February has surprised us, it chimes well with our bearish medium-term views. Our average industrial commodity price forecasts are generally significantly below consensus, particularly for industrial metals. We continue to expect the ongoing Chinese recovery to come up against structural hurdles in H213 and for growth to disappoint in the coming quarters.

Select Commodities - 2013 Average Price Forecasts
Unit Bloomberg Consensus BMI % Difference
Source: BMI, Bloomberg
Aluminium US$/tonne 2,122 1,950 -8.1
Brent Crude US$/bbl 110.00 110.00 0.0
Copper US$/tonne 8,119 7,700 -5.2
Iron Ore US$/tonne 125 110 -12.0
Lead US$/tonne 2,325 2,200 -5.4
Nickel US$/tonne 18,050 16,500 -8.6
Tin US$/tonne 23750 22500 -5.3
Zinc US$/tonne 2,126 2,050 -3.6

Silver Looks Precarious

We expect additional downside for silver in the coming weeks as both technical and fundamental support are crumbling. Fundamentally, the outlook for precious metals has deteriorated in recent weeks as a firmer US economic picture resulting from the elimination of near-term policy risks is placing upward pressure on US Treasury yields. Stronger US economic growth is placing downward pressure on precious metals as investors price monetary policy normalisation sooner than previously anticipated.

Breaking Lower
Spot Silver, US$/oz (Weekly Chart)

While we do not forecast significant near-term declines for gold, we expect silver to be more vulnerable to a liquidation of ETF holdings. From a technical perspective, silver has broken below multi-year trendline support at US$29.40/oz, which opens the door for a move towards US$26.00/oz, 6.8% below current levels.

Mass Liquidation Risk
Silver - Total Known ETF Holdings
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Geography: Global