A disappointing start for gold in the New Year

The New Year 2013 has begun on a cautiously optimistic note for the global commodity markets with the highly contentious ‘fiscal cliff’ in the US ending with an agreement on fiscal revenue, although it is widely believed the new Congress faces a difficult challenge to secure agreement on spending cuts.

This comes at a time when the world has incipient hopes of growth signals improving. The global manufacturing confidence has risen slightly. The US jobs data are improving while growth prospects in China are seen to be positive.

Despite tremendous initial enthusiasm - which hindsight has proved to be a misplaced one - the year 2012 saw a large number of commodities face a price decline on a year-on-year basis.

This was a reflection of lower rate of demand growth resulting from slowdown in industrial output and slowing economic growth.

Growth-driven commodities such as energy products, industrial metals and base metals suffered the most.

On an annual average basis, prices of all metals declined in 2012, except gold which improved only marginally.

In agriculture, sugar, cotton, coffee and cocoa prices registered double-digit price fall. Global grains market faced tighten supplies in the wake of drought in the US Midwest quickly following poor weather in South America.

In most non-agricultural commodities, the markets were in some sense adequately supplied commensurate with the level of demand. Yet, on most occasions fundamentals asserted themselves.

For the global commodity markets, the year 2013 has started on a mixed note. All precious metals were down except platinum. Gold was down 0.6 per cent over the week while silver lost 2.8 per cent and palladium 2.0 per cent.

In the base metals complex, the price performance was mixed with copper moving up 2.4 per cent, tin up 2.5 per cent and nickel up 1.1 per cent week-on-week.

In particular, gold has had a poor start to 2013 as the uncertainty over fiscal cliff ended and if anything, there are early signs that bond purchases will either slow or stop sometime during the year.

Prices fell to a four-month low of $1,626 an ounce on Friday, down as much as $70 in two days, before recovering to $1,648/oz on report that unemployment rate in the US was unchanged in December from the previous month.

Clearly, gold’s upside has most often depended on a highly accommodative monetary policy that is availability of high levels of easy money. Iron ore price rally has continued with prices rising by about 10 per cent to $153 C&F China.

Looking ahead, most commodities are waiting for triggers or signals for a change in price direction. Fundamentals will of course continue to assert themselves. However, leading indicators of growth, developments in China, dollar gyrations and geopolitics will continue to impact the sentiment. How these pan out remains to be seen. Agriculture markets are clearly seen headed for a rebound in production and softer prices subject only to return of normal weather.

Gold: With the much talked about US fiscal cliff and related uncertainty behind us, investors have begun to turn more wary of the yellow metal. After the muted price performance in 2012 belied hopes, the metal has had a disappointing start to the New Year.

Notwithstanding the ongoing hard-sell by industry lobbies, inspired researchers and wealth management experts, portends are ominous. If growth signals continue to intensify, equities markets pick up further and the US dollar gains strength, gold runs the risk of a further sell-off.

In large markets such as India, physical demand continues to remain muted with high local currency prices driving consumers away. Concerned over widening current account deficit and depreciating rupee, the Indian government has made its intention clear. There will be tariff and non-tariff restrictions on gold imports. There is strong possibility of the metal attracting higher import duty in addition to imposition of ‘commodity transaction tax’ on futures market transactions in the Union Budget slated for next month. Schemes for mopping up idling domestic gold are on the anvil.

On Friday, in London, gold PM Fix was $1,648/oz, down substantially from the previous day’s $1,680/t. Silver followed suit with Friday AM Fix at $29.32/oz, moving down from the previous day’s $30.91. Platinum was at $1,557 versus previous day’s PM Fix of $1,572.

According to technical analysts, gold momentum is bearish. The metal will face resistance $1,665 and then at $1,700, while support is available first at $1,625 and then at $1,584. Against $1,584, buying gold on dips would be a good idea, analysts have said. A move above $1,720 would confirm a bullish flag toward the $1,800 area. For silver, closing the week below $29.60 would signal lower toward $28.10. The medium term outlook is said to be bullish.

Base metals: The base metals markets generally looked up last week with copper, tin and nickel gaining. Despite looming uncertainty in developed economies, improving growth signals elsewhere are likely to prove positive for base metals.

In particular, the return of China growth is providing a tailwind to market sentiment. There is general expectation of demand improving across markets. On Friday, LME copper cash closed at $8,055 a tonne and aluminium $2,027. The latter market is in clear surplus and upside potential is rather limited.

According to technical analysts, there is reason to be bullish on copper and can buy on weakness for a move through $8,260 toward the target in the 8,400 area. For aluminium, it is advisable to be neutral in the $2,050-2,200 range and should look to buy dips towards $2,000 for V2,250. The medium term outlook is neutral.

Crude: The market is balanced. Growth signals have to intensify for a pickup in demand and flow of speculative funds. Crude is waiting for some trigger; and it is anybody’s guess when and in what form it would materialise.

Technical analysts say for WTI dip toward $90.00 area is unlikely and a break above $94.00 would confirm gains towards a higher target. Above $113.00 in Brent would confirm bullish view toward $116.00 area. The medium term outlook is said to be neutral.

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