As the world moves towards the end of 2013, some of the uncertainties facing the global economy have turned less-pronounced. Global growth signals are picking up momentum and fiscal headwinds are moderating with many analysts looking for stronger growth in the US and Europe during 2014. Geopolitical tensions have somewhat eased with the announcement of an interim deal with Iran.

On monetary policy, especially the US Fed tapering, it is clearer than before that reduction in asset purchase would begin at the earliest. This week’s key data focus will be on the US labour report. But even before the turn of events, in recent months, commodities as an asset class have not been the most favourite. Investor appetite has been weak. Return on investment has been far from attractive.

With winter and holidays looming, in the next couple of months commodity markets will witness subdued activity. Improving equity market sentiment and firming dollar will pressure commodities down in general and gold in particular.

Last week in London, metal prices were generally weak. Precious metals were mixed with platinum losing 1.4 per cent over the week while gold and palladium edged up by 0.5 per cent and 0.4 per cent respectively. Silver stayed unchanged. Among base metals, LME cash aluminium came under pressure and shed 1.6 per cent in value over the week, followed by lead (-1.5 per cent). Others edged lower. Oil WTI was down 1.4 per cent after the agreement with Iran.

Dull Gold

With the dollar firming against the euro and equity markets retaining their strength, gold prices have been under pressure. The metal failed to find support from the October FOMC minutes and dipped below $1,250 an ounce.

Indeed, in November, prices fell by over 5 per cent and year-on-year fell more than 25 per cent. Investor appetite is weak and physical demand looks enervated despite recent price falls and seasonal factors. ETP outflows have been heavy and are currently the holdings are below 2,000 tonnes, a new low since 2010.

On the other hand, silver has become even more vulnerable when seen year on year. Its Friday London close of a tad below $20/oz reflects a 40 per cent decline from $34 in November 2012.

On Friday, in London, all precious metals moved up erasing some of the losses of previous trading sessions. Gold PM fix was $1,253, higher than the previous day’s $1,246. Silver AM fix was $19.93 versus the previous day’s $19.76. Platinum ended at $1,376 ($1,357) and palladium $724 ($717).

A delay in tapering has only provided a temporary respite for the yellow metal. Bearish fundamentals, unhelpful currency , weak physical demand and lack of investor appetite have combined. Should prices breach $1,200 mark (which looks absolutely possible), the weakness is likely to be exacerbated given that additional holding in the physically-backed ETPs will become loss-making and outflows will accelerate.

Is there a silver lining to the otherwise poor sentiment in the gold market? Yes, there is. China is buying huge quantities of gold from Hong Kong. China’s imports have accelerated in the last ten years. Although currently month on month imports figures look erratic, the pattern is unmistakable. Based on customs data, it is estimated that January-October imports were nearly 950 tonnes, raising the prospects of annual imports breaching the 1,000-tonne mark. With the recent price fall in dollar terms, China’s imports have become heavier.

Metals mixed

On Friday, LME cash copper closed at $7,054/tonne, aluminium at $1,710 and lead $2,055. One of the big surprises of this year has been copper.

According to International Copper Study Group, there has been a 6 per cent rise in refined production. However, analysts point out that visible inventories are declining. As regards aluminium the market could get into deficit in 2014 after several years of structural oversupply. Decline in nickel and aluminium prices over the past week looks overdone, according to experts who point out to the potentially significant supply risks from Indonesia.

Crude may slip

While the interim agreement with Iran on its nuclear program holds out the promise of a solution to one of the key issues affecting not only crude oil supply but also the broader instability in West Asia, the road ahead is likely to be long and arduous.

(This article was published on December 1, 2013)
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