The commodity sector reversed gains over the past week amid a confluence of reasons ranging from concerns over the downside risks to the global economic recovery to ongoing worries on the sovereign debt crisis in the Eurozone to dissipated hopes on the Fed's QE3. Most commodities under our coverage fell last week. In the oil complex, the prompt-month contract for WTI crude oil plunged for the first time in 4 weeks, by -2.80%, to settle at 106.7 Friday. The contract soared to a 9-month high of 110.55 earlier in the week. The equivalent Brent crude contract slipped -1.45% last week, following rises for 5 straight weeks.

As tensions over Iran escalated over the past months, oil prices surged amid worries that oil suspension in Iran would bid up prices, affecting especially European buyers. Crude prices continued rallying earlier in the week with WTI and Brent crudes reaching important levels (above 110 and above 125 respectively) after a report stating that a pipeline in Saudi Arabia was exploded. The rumor was later denied by Saudi's spokesman but the dramatic reaction in the oil market indicated investors' sensitivity on possible oil supply shortage.

Indeed, there have been saying in recent weeks, as oil prices climbed higher, that the fragile global economic recovery would be hampered by rising oil prices. Such concerns have turned more apparent as Brent crude has on Thursday breached the 2011-high and approached the 2008 crisis level. In the surveillance note to the G-20, the IMF warned of major downside risks, including risks from high oil prices, facing the global economy. The world lender stated that 'the overarching risk remains an intensified global 'paradox of thrift' as households, firms, and governments around the world reduce demand...This risk is further exacerbated by fragile financial systems, high public deficits and debt and already-low interest rates'. It went on to say that 'advanced economies are experiencing weak and bumpy growth, reflecting both the legacies from the crisis and spillovers from Europe'.

Despite approval of the second bailout to Greece, market confidence towards the 17-nation Eurozone has remained weak. Following S&P's downgrade of Greece's rating, Moody's announced that the debt-ridden country's rating to C from Ca, warning that investors participating in the country's PSI program would likely receive less than 70% of the face value of their holdings as the deal contains 'a distressed exchange, and hence a default'. Elsewhere, Spain breached its commitment with the EU and raised its deficit target of 5.8% of GDP this year from previous goal of 4.4%. These added worries to the region's economy as well as the euro.

Natural gas prices weakened for another week. The DOE/EIA reported that gas inventory dropped -82 bcf to 2 595 bcf in the week ended February 24. Stocks were +756 bcf above the same period last year and +780 bcf, or +45.0%, above the 5-year average of 1 733 bcf. Separately, Baker Hughes reported that the number of gas rigs fell -19 units to 691 in the week ended March 2. Oil rigs soared +28 units to 1 293 and miscellaneous rigs dipped -1 unit to 5, sending the total number of rigs to 1 989 units. Directionally oriented combined oil, gas, and miscellaneous rigs climbed +5 units to 215 while horizontal rigs increased +5 units to 1 170 and vertical rigs fell -2 units to 604 during the week.

The precious metal complex plummeted as led by gold and silver. The yellow metal slumped more than $100 after the Fed Chairman Ben Bernanke's testimony on Wednesday. Investors viewed that the Chairman's expectation that growth in the coming quarters would be 'at a pace close to or somewhat above the pace that was registered during the second half of last year' is an indication of no further quantitative easing. The disappointment was exacerbated by St. Louis Fed President James Bullard's comment that no further easing is needed as US economic data improves. He also expected US' unemployment rate to drop to 7.8% by the end of this year as a 'moderate expansion' helps improve the labor market.

Although speculations of further quantitative easing by the Fed have been tamed, this has not dampened our bullish view on gold's outlook. We continued to believe that monetary policy by central banks will be positive for the yellow metal. Note that gold, despite persistent sovereign debt crisis in the Eurozone, has not been rising in tandem with the US dollar like last few years. We believe that the Fed would continue to weigh growth higher than inflation while the ECB prioritizes price stability. This would give the US dollar higher opportunity to depreciate further, thus boosting gold. Another issue is that further rises in oil prices may deteriorate the US recovery prospect, making the Fed more dovish in its monetary stance.