Commodities in a Volatile Market

1) Instability and Resistance in Commodities

Instability in the US Dollar and fear of a continued slump in the US market has investors still on the worry track. The treadmill continues as investors keep looking for stability of hard assets such as gold, copper, platinum and silver during these volatile times. It is debatable whether the Fed’s will be able to rescue the economy by cutting interest rates another half percentage point which keeps investors on the worry treadmill.

Gold has enjoyed a 10% price surge in the first part of 2008 compared to a 32% gain in all of 2007 and 23% in 2006. As gold is continuing its climb to record and near record highs of around $940 other commodities are rallying as well. Before the Fed’s announcement last week gold and platinum both rose quickly in anticipation of the expected Federal Reserve rate cut. After the Wednesday January 30th half percentage point rate cut by the Federal Reserve gold, platinum, copper and silver all rose to near resistance.

Resistance seems to be more of a psychological glass ceiling rather than an overall market resistance. Gold and silver are both still in the not-over bought category according to the relative strength index. With silver showing some resistance even if only psychological at around the $16.70 mark.

This remains to be uncharted territory for gold investors as gold’s rise continues on the shirt tails of oil’s sudden surge in price. At the same time silver is enjoying a continued up swing, with only slight downward movement when oil prices tumbled then had a nice rebound when oil prices bounced up.

2) Commodities Supply Shortages

China and India as growing markets are continuing to see supply shortages in the metals market. Over the next two decades gold and other precious metal prices are likely to see a prices climb to un-heard of levels.

In recent months the rolling blackouts in South Africa due to a short power supply have caused mine production to suffer a steep decline. At the same time as the decline the demand for gold and other metals commodities are continuing to see a rise. Officials in South Africa have called the rolling black outs a national emergency.

The major mines Harmony Gold Mining, AngloGold Ashanti and Gold Fields are all in need of steady power. The mines need power to ventilate the shafts and to pump water out of mine shafts that can reach up to four kilometers deep. The recent shut down of mines has caused lost revenue to be estimated between $12 million per day to $250 million per day. Government officials in South Africa have been able to ration enough power to get the mines operational again and up to almost 90% efficiency.

3) Rising Demand for Metals Commodities

Rising income levels in India and Asia as these areas begin to industrialize and wealth grows is causing a foreseeable demand in gold. The tight supplies for mines and the build up of metal Exchange Trade Funds as well as increased operational costs to the mining industry are bringing the line of support for gold and other commodities to higher levels.

Holidays during the seven months ranging from August to February have coupled with interest rate cuts to bring the seasonal demand for gold up. Jewelry sales which equate to approximately 70% of the gold demand see an increase each year as Ramadan which occurs sometime between August and November kicks off the holiday season. The Jewish New Year in September, Diwali celebrated in India in November, Christmas during December in the west, and the Chinese New Year in February all combine to see an increase in gold demand and prices.