London, 6 July 2011: Reuters

Last month's belaboured LME metals price performance and the investment banks' response is neatly captured in the punchy headlines of Credit Suisse's daily research notes. On June 13 and June 14 Credit Suisse was advising "Buy this dip" and "Next big move should be higher." One week later, it was a case of "Continue to keep the faith?" and one week after that it was "Getting tired."

The Swiss bank remains undeterred and its monthly research note, issued on June 28, was headlined: "Current pessimism creates opportunity for value investors." It is in good company. There is still a strong analysts consensus that industrial metals will move higher again after the Great Commodities Rout of May, the latter representing nothing more than a blow-off of speculative "froth" to quote Ivan Glasenberg, chief executive of Glencore. Dissenting voices are few and far between, although Citi merits an honourable mention for its bold call in early May that "a new cycle high for copper now seems unlikely."

This is still a heretical view. Just about everyone else is telling investors to "keep the faith" with commodities in general and industrial metals in particular.

Graphic on commodity performance in Q2:

http://graphics.thomsonreuters.com/11/04/CommodsQ2.html

Graphic on Commodity prices in 2008, 2010, 2011:

http://graphics.thomsonreuters.com/11/01/CMD_PRCS0411_CT.html

ANXIETY

It's a message that has been falling on partially stony ground in the last few weeks. Almost $7 billion of investment money was withdrawn from the commodity complex in May, the largest single monthly outflow since the financial crisis of 2008.

Significantly, this was not just a case of retail investors pulling funds out of gold and silver exchange-traded products. Rather, it was also institutional investors exiting commodity index swaps and mutual funds. Barclays Capital, which made the assessment, attributed the reverse money flow to investor "anxiousness."

"Recent events in commodities markets are clearly a repeat of a pattern seen several times in the past when investors become fixated by issues external to the pure fundamental dynamic of commodities markets. However, given the constructive fundamental background and still impressive demand growth across a number of commodities markets, we anticipate this blip to be short lived."

In other words, if we could all just stop worrying about Greece and the euro and let the likes of copper and tin, the bulls' twin favourites for 2011, get on with their own thing, the sooner will we hit the sunny uplands of new price highs.

So, who is right? Those, such as Barclays and Credit Suisse, who argue that it is just a matter of time before we get back to the "real world" of tightening fundamentals? Or those anxious investors who are starting to beat a retreat from the commodities sector?

MACRO NOISE

It is certainly true that macro events, most notably Greece, have been injecting volatility into the whole risk on, risk off asset trade as the investment herd either careers between optimism and despair or schizophrenically tries to bet on both simultaneously (think gold).

But to argue that this is just "noise", obscuring the true signals from the commodity complex, seems a bit like telling people in the summer of 2008 not to get fixated on Bear Stearns or AIG. Greece may be a peripheral part of the euro zone and the global economy but a default will be anything other than marginal to the rest of the world.

And while European policy-makers may be making increasingly inventive use of the English language to avoid using the "D-word", it's the word on everyone's lips on the London "Street."

Most would agree with RBS economist Silvio Peruzzo, who said of the European Central Bank: "They have looked at the numbers. The ingredients are there to make this very very bad...It would be a spiral once it started." A spiral that would work its way through other "peripheral" European countries such as Ireland, Portugal and, gulp, Spain, the latter widely believed to be "too big to fail", for which read "too big to save."

The Greek Parliament's sign-off on another austerity package, which fuelled last week's relief rally, marks only the tiniest of steps forward. The crisis continues and while it does, it will in all likelihood continue to dictate risk sentiment across all asset classes, commodities included.

Other macro "noise" such as the slowdown in China and the "soft patch" in the U.S. economic recovery is hardly irrelevant either, given the industrial metals' historical linkage with manufacturing growth.

China is once again walking the tightrope between soft and hard landings. Economic activity will slow. That's the point of Beijing's current policy. It's just a case of whether policymakers can tame overheating sectors such as commercial property without triggering a more tectonic downturn. Watch this space. Everyone else is.

Manufacturing in the U.S. has been a rare bright spot in that country's "recovery" narrative but it remains a lopsided phenomenon with construction a drag and likely to remain so for the foreseeable future. The most recent suite of global PMIs didn't make for encouraging reading, promising an overlay of structural slowdown on the usual Q3 seasonal weakness in metals demand.

MICRO TROUBLE

The idea that it is only macro "noise" obscuring positive metals-specific fundamentals also poses the question as to just how strong those fundamentals really are. Rather than deficit markets leading to higher prices in the likes of copper and tin, higher prices have created surplus markets, at least so far this year.

The early-year price surge triggered the release of statistically "invisible" off-market stocks, producer inventory in the case of tin and Shanghai bonded warehouse stocks in the case of copper. LME inventories have risen rather than fallen.

Curiously, the only base metal that has shown consistent signs of market deficit, nickel, is the one that has been pounded into the ground. As for zinc, it remains the ghost of excess past at the bull party. Burdened by high stocks, both Chinese and LME, production continues to outstrip demand. In a fundamentally-determined market, the zinc price should be somewhere close to the cost of production.

But it is not and producers continue to capitalise on that fact, as witnessed by the number of legacy mine projects that are being taken out of mothballs. Zinc is an unwelcome reminder that there is something not quite right with the current bull narrative, suggesting as it does a speculative premium in the price that is not so clear to see in the other metals.

More on the metals' individual dynamics in the second part of this column. But that big May correction with its noted lack of specific trigger should serve as a reminder that there are many fault-lines, both macro and micro, running through the consensus bull narrative.

To ignore them all requires, well, a good deal of "faith", which is defined in my dictionary as "strong or unshakeable belief in something, especially without proof or evidence." It's all a case of whether you believe. Do you?

Ends --

By Andy Home, Reuters market analyst – for Commodities Now.

The views expressed here are his own.

(Part II of this column is HERE).