From gold to oil to copper, prices of commodities fell on Thursday, reversing the gains made this year, as China took actions to stabilise prices and the US dollar strengthened.
Gold lost over 2 percent on Thursday, precipitating a sell-off across precious metals. Thursday was the worst day for Palladium in over a year, tumbling over 10 percent to $2,517. Platinum too lost 6 percent yesterday. Copper is heading for its worst week in a year and Silver is down for the year.
Soybean futures erased 2021 gains and declined 20 percent from eight-year highs in May. Crude oil prices also fell 2 percent from the highest level on Thursday. Other commodities like wheat, corn, lumber weren't behind either.
The fall comes after a stronger first half of 2021 for commodities. The rally was fuelled by increased industrial demand and the reopening of global economies.
What could be behind the sell-off? Why did a commodity sell-off occur while analysts were still talking of commodity supercycle? Let's find out.
Reasons behind the slump
While global equity markets are adjusting to the sell-off, Asian markets saw some commodity buying on Friday morning, as base metals rose nearly 0.5 percent.
Gold is headed for its worst week since March 2020, after the US Federal Reserve moved the timeline of the first post-pandemic interest rate hike to 2023.
Instead of keeping the interest rates near-zero through 2023, Fed now sees at least two interest rate hikes by the end of 2023. According to analysts, this triggered the market-wide commodity sell-off.
Fed's hawkish statements pushed the US dollar to a two-month high. On Thursday, the American currency was on track for its best week in nine months. This dented the appeal of commodities, by making them more expensive.
Since commodities are priced in dollar, they move inversely to the US greenback. Now, since selling commodities could get investors more dollars, selling intensified overnight.
The holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, indicated the sentiment. The ETF fell 0.14 percent on Thursday.
But, there were other factors working here. Fed's comments and the US Dollar rally served as accelerators to a slide that had begun early this week.
“There are two macro headwinds that we see in commodity markets. The first one is the possibility of taper tantrums. Though it is still very premature to say taper tantrums, the indications are very clear.
The second one is uncertainty regarding Chinese policies," Amit Dixit of Edelweiss Institutional Equities told CNBC-TV18.
China, on Wednesday, announced plans to release reserves of key metals to rein in commodity prices. China is the top metal consumer
National Food and Strategic Reserves Administration of China will release state metal stockpiles, including, copper, aluminium, and zinc. The batches would be released to nonferrous processing and manufacturing firms via public auctions.
China has also stepped up its campaign to reduce speculation in the commodity market. In part, speculation was driving commodities higher all this time.
This comes after the figures showed China's May factory gate prices rising at their fastest pace in over 12 years due to surging commodity prices. While Beijing was taking steps to cool down the metal rally earlier, the data made the state step up its efforts.
China's crackdown has ignited a sell-off in base metals. Further, the price fall has some seasonal factors as well.
"The next quarter (from July-September) is seasonally weak in terms of demand in many parts of the world. So, prices will go downward from here," Dixit added.
"Weakening physical demand and slowing speculative flows into gold, both of which began before the Fed meeting, could also help to drive a further pullback," Daniel Ghali, commodity strategist of TD Securities told Reuters.
The coming quarter may see a pullback in prices, but that would mostly be seasonal, as Dixit mentioned earlier. As for Gold, analysts believe the reaction here is slightly overdone.
"Despite the current high-growth, inflationary environment, the proposed Fed rate hikes are not expected to set in for at least another 18 months. So after a bit more weakness here, gold prices will regroup and push higher," Edward Meir, ED&F Man capital markets analyst told Reuters.
And analysts believe inflationary concerns shall take over concerns of strengthening the dollar in near future.
“We have seen the dollar strengthen and that is bad news for gold over the short-term. But there would be inflation concerns and so the case for gold for the foreseeable future is still relatively strong,” Philip Newman, MD of Metals Focus told CNBC-TV18.
(Edited by : Abhishek Jha)