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The precious metals complex came under severe downward pressure last week even as demand weakness combined with hawkish indication from the US Federal Reserve of monetary policy normalisation resulted in selling. From a policy perspective, employment generation and inflation expectations are high on the Fed’s agenda.
Over the week, in the London market, gold, silver and platinum markets witnessed a sell-off with platinum taking a 2.1 per cent price decline to $1,416 an ounce on Friday and silver falling 1.9 per cent to $19.49/oz. Gold performed relatively better losing 1.4 per cent move down to $1,277/oz in PM Fix on Friday.
Clearly, technical-led selling pushed gold prices below $1,300/oz testing levels last seen two months ago. However, geopolitical tensions continue to support gold from a further fall.
On the physical side, consumption demand remains weak in major markets including India and China. So, this factor is unlikely to provide any durable cushion for gold floor prices.
At the same time, incurable gold bulls are now betting on a pickup in seasonal demand in traditionally large markets such as India.
But a below-normal monsoon, limited prospect of rise in rural incomes, untamed food inflation and high rate of import duty (10 per cent ad valorem ) will operate to curb demand growth in India. So, gold prices will continue to remain fragile with a weak floor amid investor fatigue.
In sum, slowing physical demand growth and prospect of monetary policy normalisation in the US both are a threat to gold’s upward trajectory.
As for silver, which usually rides on the coattails of gold, the market looks oversold. But, clearly silver market fundamentals do not justify higher prices. The world market is in a state of surplus estimated at about 6,000 tonnes. At the same time, without doubt, industrial consumption of silver has been rising.
So, the critical question is whether rising use in industry (electronics, automobile) can allow silver to decouple from gold. Most experts believe that at least over a 6-12 month period such decoupling is most unlikely.
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