Caution is the keyword for investors in gold

For the global commodity market, the good news last week was that the OECD composite leading indicators point to stabilising economic growth in most major economies even as the leading indicators for the US continue to point to economic growth firming, while in China and India the signs of a turning point are more marked than was the case a month ago.

This improving global economic environment should be positive for growth-driven commodities such as base metals and energy products.

Precious metals were in the limelight last week with price gains across the board. Platinum rallied towards $1,700 an ounce, regaining its premium over gold albeit briefly following anticipated supply tightness due closure of some mines.

While gold gained by 1.9 per cent over the week, silver outperformed with a 3.7 per cent price rise. Platinum and palladium prices showed robust move up 3.1 and 4.1 per cent respectively week-on-week. Crude WTI gained 2 per cent.

On the other hand, base metals generally moved down or stayed flat, except zinc which gained marginally.

However, on Friday, release of China’s GDP figures provided a rallying point, especially for base metals. China GDP rose by 7.9 per cent year-on-year in the fourth quarter of 2012 (higher than 7.4 per cent in Q3).

In terms of investment and returns, commodity assets performed more weakly than other asset classes in Q4 and fell further behind in early 2013.

“The poor performance of commodity investments since the third tranche of quantitative easing in the US, popularly called QE3, has undermined the claim that liquidity injections boost prices irrespective of fundamentals,” observed an expert, adding 97 per cent of last year’s $20 billion of inflows went solely into precious metals (mostly gold-backed ETPs).

Investors are now taking money out of gold which is unlikely to lead the pack again, the expert remarked.

Gold prices bullish

The yellow metals has had a rollercoaster start to the year with the price rally after the US agreement on fiscal revenue petering out following FOMC minutes suggesting possibly an early withdrawal of QE.

Platinum prices surpassed gold prices.

In London on Friday, gold PM Fix was $1,689/oz, up from the previous day’s $1,675.

Silver moved in tandem with Friday AM Fix at $31.82 versus previous day’s $31.50. Platinum’s Friday PM Fix was $1,677, down from the previous day’s $1,683. Palladium closed at $722.

The recent gold survey update, while acknowledging growing risks to gold bull market, has remained bullish on gold prices in the first half of 2013 based on continued loose money policy, concerns about fiscal policy and other economic risks.

Gold average price in H1 is seen at $1,775/oz. Given tepid physical demand conditions, threat of the world’s largest importer India imposing restrictions, liquidation of long positions in the bourses and improving equity markets, the price outlook is rather optimistic.

Gold prices in dollar terms won’t rise stridently as forecast unless the US dollar weakens considerably, inflation catches up, geopolitical instabilities mount and central banks covet the metal.

Gold is less-likely to rally or stay well above $1,700/oz in the foreseeable future.

So, utmost caution is necessary in investment decision. Many analysts have actually reduced their price forecast.

The more realistic price forecast for Q1 seems to be $1,700. There are known and unknown risks in taking far forward positions.

Base metals-subdued

The sentiment towards base metals is quite subdued. The market is torn between a supportive macro picture of stabilising or firming global economic growth on the one hand, and unfriendly market fundamentals on the other.

The supply side is comfortable and so are inventories. There is an opportunity to sell some metals short.

Friday, LME cash aluminium closed at $2,007 a tonne, while copper closed at $8,036.

Crude: Mixed trend

The market had a mixed week with front-month WTI continuing to inch higher, while the equivalent Brent contract moved sideways and the price differential narrowed to about $15 a barrel.

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