Global gold prices set to fall further

The latest OECD composite leading indicators (CLIs) have pointed to only moderate improvements in growth in most major economies; and if any evidence was required to reinforce this, global commodity markets provided it.

The US and Japan are the only countries where the lead indicators point to economic growth firming. In other major economies, they point to limited growth momentum. CLIs are designed to anticipate turning points in economic activity relative to trend.

Among emerging markets, China and Brazil show growth closer to trend rates. While growth is losing momentum in Russia, for India it continues to indicate growth below trend.

No wonder, emerging economies were the focus of market attention last week. Weak Chinese data covering lower trade volumes, deceleration in industrial production and slowing property investment took their toll on commodity prices.

All base metals had a poor week. Aluminium and nickel were the worst performers with price falls of 4.9 and 4.8 per cent respectively.

All precious metals, with the exception of gold, struggled.

Silver was the laggard and was down 4 per cent while platinum and palladium were down 3.8 and 3.4 per cent respectively. Gold edged up 0.4 per cent.

Despite sagging sentiment, surprisingly, the oil market was up over the week with WTI gaining 1.8 per cent. Crude oil traded generally within a narrow range of $3.

The market last week was characterised by increased volatility, vanishing liquidity and correlations breaking down across global asset classes, commented an expert.

Agricultural markets have, for some time, been quiet to weak with a rebound in supplies and prospects of northern hemisphere harvest improving. Corn, wheat, oilseeds, cotton and sugar markets have been steady.

Gold: losing sheen

Prices ended the week below the psychological $1,400 an ounce level. Last week, the market was buffeted by a host of reports including ECB announcement, the US May employment report, trade data, Indian import duty hikes and the dollar. The tug of war between weaker investment demand and strong physical demand is now slowly giving way to slowing physical demand and investment demand both.

Gold ETP outflows have slowed too with limited net redemption even as the size of cash negative positions is now estimated at about 70 tonnes. So, redemptions will persist for some more time.

On Friday, in London gold PM Fix was $1,391, slightly up from the previous day’s $1,385. Silver slid further to a Friday AM Fix of $21.69 versus the previous day’s $21.83. Platinum ended the week at $1,448 and palladium $743.

Indian policymakers continue to threaten the gold market with talks of sterner restrictions.

With the start of agriculture season, physical demand has already slowed down and will stay that way for another three months at least.

However, the tragedy for Indian consumers is that a sharply depreciated rupee has substantially negated the benefit of fall in gold price in dollar terms.

Platinum’s premium to gold has been widening. This follows reduced investor appetite for gold relative to the tight market balance in platinum.

Given the persisting downside risk to gold prices, the premium has the potential to increase.

According to technical analysis, gold’s uptick towards 1,400 looks weak, but a move lower through 1,350 will open the lows at 1,335 and then 1,320.

Metals drift

Price weakness across the complex has persisted in recent weeks. Many analysts are downgrading their price forecast for the second half of the year.

LME open interest for all the metals has been increasing. A steep rise in aluminium open interest and continued decline in prices suggests more short-selling which has outweighed the active consumer buying at lower price levels, an expert remarked.

The copper story is no different with rising open interest going with falling price.

The market is poised to move lower in H2 following a surplus situation and Q4 can potentially be the weakest point for prices this year.

Friday last, on LME, aluminium closed at $1,810/tonne and copper $7,056. In nickel, fresh shorting has taken prices to $14,055, the lowest since 2009.

Technically speaking, base metal prices can be expected to extend lower toward May range lows where one can look for signs of an interim base.

Crude may rebound

In an interesting development (not totally unexpected though), IEA’s monthly oil market report has highlighted that in April this year, non-OECD oil demand has overtaken OECD oil demand for the first time.

This is a long-term trend in the oil market.

It is, however, a paradox that while emerging market crude demand is reaching a critical mass, the economic growth outlook for these markets is less inspiring.

No wonder, oil prices have held up quite well as compared with other commodities. From here on, as seasonal demand kicks in, prices have the potential to rebound.

From a technical perspective, the range break in Brent signals further upside toward the 107.50 area where one can look for signs of a top.

COMMENT NOW