The Hindu Business Line : Precious metals to grow stronger in H1

PRECIOUS metals markets are expected to be strongest in the first half of 2004 with peaks to occur late in the first quarter or early in the second quarter.

A central justification for the split into a year of two halves' is the economic view that US interest rates and the dollar, after further weakness early in the year, will begin to rise from the middle of the year due to strong US economic growth, according to Barclays Capital.

``However, of at least equal importance, we see the physical commodity fundamentals of gold, silver and platinum as either being conducive to, or not preventing, further upward progress during the first few months of 2004 but then weakening or turning decidedly bearish as the year progresses,'' the investment banking division of Barclays Bank Plc said in its precious metals price forecast for 2004.

The combination of an apparently official stance in the US and Europe accepting a weak dollar, plus growing evidence of strong economic growth, fuelled investor interest across precious metals. The buying surge also reflected capital inflows into the technically driven market following strong relative performance, creating a heady combination, according to Mr Kamal Naqvi, Barclays' precious metals analyst.

Silver Forecast: Silver may average $6.40 an ounce with a high of $7.00/oz and a low of $5.70/oz during 2004, according to Barclays Capital. Silver has made an early claim to be the star of 2004 with prices bursting to six-year highs. The move in silver is difficult to attribute directly to its commodity fundamentals although it is true that silver is increasingly being traded as an industrial commodity and often followed the trend in base metals last year.

Further, the commodity fundamentals are improving from very poor levels with demand from jewellery and electronics showing signs of growth, while there is hope that growing photographic demand from emerging markets will outweigh losses from the fast growth in digital photography.

``However, the recent surge has been based more on silver's traditional roleas an investment alternative to gold, with investors seeing silver as better relative value,'' according to Mr Naqvi.

The speculative appetite for silver is ravenous, with long positions on Comex surging to record levels equivalent to half of annual mine supply, the analyst pointed out adding that current price levels are unsustainable over the medium term, attributable to a significant reaction from Indian demand, increased scrap supplies, higher Chinese exports and increased producer selling. However, all these market-balancing factors need time to take effect. ``Hence, aside from the occasional correction, we expect prices to test higher in the first few months of the year before correcting back below $6.00/oz,'' he said.

Mine production in 2004 is forecast at 18,200 tonnes (18,000 tonnes in 2003) and total supply at 28,200 tonnes (28,900 tonnes). Total fabrication demand for 2004 is placed at 27,700 tonnes (26,400 tonnes), leaving a statistical market balance of 500 tonnes (2,600 tonnes).