Gold loses as physical demand slackens

Global commodity markets covering energy, metals and agriculture were last week subjected to the pulls and pressures of a combination of rising geopolitical tension, concerns over ‘fiscal cliff’ in the US, a general risk-off environment and improved weather conditions in South America.

The front-month WTI-Brent differential achieved a fresh yearly high of over $25 a barrel. Precious metals were mixed with gold, weighed down by a risk-off environment, down 1.4 per cent last week, while palladium performed strongly closing up 1.8 per cent bolstered by JM report of deficit in 2012. All base metals were up over the week except lead that slid 0.8 per cent. Aluminium and zinc prices rose to a one-month high on report of China beginning to stockpile the metals after over three years.

Following the release of USDA monthly WASDE report and amidst indications of improvement in South American weather conditions, grains prices remained under pressure last week.

Upward revision in 2012-13 US soyabean yields and production weighed on soyabean prices which fell sharply. Outlook for cotton is bearish.

Gold: Prices softened last week as the bullish effects of QE3 have thinned amid a risk-off environment. In London on Friday, gold PM Fix was $1,714 an ounce versus previous day’s $1,710. Silver lost some ground with Friday AM Fix at $32.27/oz versus previous day’s $32.57.

Physical demand for the yellow metal continues to be lacklustre except for some temporary signs of a small pick up due to festival demand in India. Otherwise, concerns over fiscal cliff in the US and developing geopolitical tensions are supportive.

According to the latest World Gold Council report, gold demand fell 11 per cent year-on-year from a strong base, but was up 10 per cent quarter-on-quarter. Also, there will be close call between China and India in terms of consumption of the metal in 2012. While China is likely to consume 750-800 tonnes, Indian consumption is projected at 700-750 tonnes.

Gold’s resistance is seen at 1,726 and then at 1,755 while support is seen at 1,700 and then 1,680. According to technical analysts, gold is set for a continued drift lower with medium-term bulls finding support between 1,685 and 1,690. Platinum is leading precious metals on its way to key support at 1,530.

Base metals: Political transition in China and uncertainties relating to the US fiscal cliff ensured that any sustained movement in the complex was held in check. No wonder, LME prices showed limited change generally over the week.

However, aluminium and zinc actually stood out rising by about 3 per cent on reports of Chinese State Reserve Bureau buying 100,000 tonnes of both the metals.

On LME, cash copper closed at $7,596/tonne and aluminium $1,930.

According to technical analysts, there may be no change in copper as sideways chop continues. Bias remains bearish, but range lows at 7,506 have held, so conviction is low.

Aluminium’s bearish drift is likely to continue.

The medium-term outlook is said to be bearish.

Crude: The fundamental demand and supply picture stays well balanced.

Over the coming month, it may be reasonable to expect crude prices to stay within the current trading range. The downside risk is limited, but upside risk continues to outweigh because of geopolitical issues.

According to technical analysts, Brent is slowing creeping to resistance near its range highs at 110.70, above which would indicate directional traction and open upside to the larger range highs at 116.90. WTI is still oscillating at 84.50-90 range. The medium-term outlook is said to be neutral.

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