Gold and silver under pressure; cash is king, right now

G. Chandrashekhar
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With turbulence continuing, global commodity markets registered yet another week of volatile conditions and generally weakening prices in the wake of unsettled macroeconomic conditions, worsening sentiment and choppy external markets.

In particular, the unresolved euro area debt crisis continues to pressure markets and macroeconomic sentiment. The market is unsure whether the world will face a mere slowdown or something worse.

Currently, speculators are exiting most markets as they prefer to sit on cash because of falling asset prices. So, cash is king, right now. It would take sustained flow of positive macro data for the market to regain confidence. Portends are ominous though.

The base metals complex has been the worst hit. There was a bout of liquidation last week with the fragile macro sentiment continuing to remain a cause for concern. Will global growth expectations be further downgraded? It is in a sombre mood of uncertainty that participants at the LME Week would discuss market prospects. Chinese situation will, of course, come in for close scrutiny because demand indicators from the Asian major are encouraging.

The oil market remains in the grip of uncertainty over demand and fear of demand destruction. Brent has managed to stay well above $ 100 a barrel. Admittedly, global oil demands growth has slowed from last year's high base yet remains healthy by historical standards, according to experts who assert that should global growth continue to contract, demand could be scaled back sharply.

The steel sector is under pressure because of uncertain macroeconomic environment. No wonder, participants are keen to reduce inventory levels. Steel prices may remain suppressed in the near-term. Interestingly, even as the steel market is under pressure, iron ore market has remained healthy with prices close to record levels, unlike many exchange-traded commodities. Here again China's small steel mills have helped to keep the momentum.

Overall, until there is clarity on the major ongoing issues such as sovereign debt and direction of global economic growth, markets are likely to remain volatile and be buffeted by short-term or transient factors. The road ahead is bumpy and be ready to face choppy markets.

Gold: All precious metals fell week-on-week with platinum (8.5 per cent), palladium (6.8 per cent), silver (7.4 per cent) and gold (4.1 per cent) losing value in the London market. Weak investment appetite has been cited as the reason for the price decline. Towards the end of the week, gold prices edged higher as the dollar weakened and physical demand remained healthy.

On Friday in London, gold PM Fix was at $1,620 an ounce, slightly up from the previous day's $1,613/oz. Silver followed suit with Friday AM Fix at $30.45/oz versus the previous day's $30.19/oz.

All precious metals in general and gold in particular have been under pressure for a combination of reasons including risk aversion, liquidity needs, technical selling, increased volatility and margin requirement hikes. However, the ongoing growth uncertainty and financial market instability is actually gold-supportive. Physical demand has emerged at the current relatively low prices ably supported by seasonal factors. However, gold will have to tackle some near-term pressure. Silver prices have suffered because of weak fundamentals.

Base metals: The complex continues to price-in downgrades to global growth. The weaker demand outlook and collapse in sentiment has prompted analysts to revise their base metals price forecasts. It is amidst this scene of uncertainty and pessimism that LME Week begins where experts will crystal gaze into the future of base metals. China will, of course, be the focus of wide and in-depth attention. The Asian major remains a ray of hope for this market as Chinese demand continues to remain healthy and supply-pipeline inventories are thin globally.

Metals to lose value last week were copper (4.7 per cent), nickel (3.8 per cent) and zinc (2.7 per cent), while lead gained modestly (2.2 per cent) and tin (0.8 per cent) on LME. Copper is now at an unbelievable $7,000 a tonne, the lowest over a year; while nickel is at $17,570/t.

As we have been saying, only a sustained flow of positive macroeconomic data will help regain market confidence. When that begins to happen, the market will quickly price-in supply-side issues. Copper is the prime candidate for a rapid price escalation given its market deficit, mine supply disruptions and strong Chinese demand.

(This article was published on October 2, 2011)
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