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Gold seen under pressure on outflows from exchange-traded products

G. Chandrashekhar
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All precious metals were down except silver.
All precious metals were down except silver.

Global commodity markets have had a poor start to 2013 with prices declining nearly across the board. Weakness in March meant that all base metals, most precious metals (notably gold and silver), iron ore and coking coal prices fell over the quarter.

Gold and silver ended the quarter 4 per cent lower from where they started. In particular, gold suffered from an investor sell-off with sustained outflow of the metal from physically-backed Exchange Traded Funds.

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Week on week, all precious metals were down except silver which was up 1.6 per cent while gold was down 2.1 per cent, platinum down 1.1 per cent and palladium down 0.6 per cent.

Base metals were generally flat to down last week except that lead was marginally higher, while copper stayed unchanged. Tin was the worst performer with a price decline of 3.9 per cent. West Texas Intermediate crude was down 2 per cent.

pressurised

Despite supportive developments such as Bank of Japan’s larger-than-expected monetary easing, prices have come under intense pressure even as outflows from exchange-traded products (ETP) have accelerated early April. This is one single factor that is likely to create further downside risk for gold. Clearly, investor conviction has been lost as evidenced by large scale sell-off.

Precious metals had a torrid Friday, an analyst remarked, with gold and silver plunging to multi-year lows in intra-day trading. In London on Friday, gold PM Fix was $1,482.75 an ounce, down from the previous day’s $1,565. Silver followed suit with Friday AM Fix of $26/oz versus the previous day’s $27.57. Both platinum ($1,486) and palladium ($707) were fixed lower on Friday.

While prices have some support from the physical market, outflows from ETPs have to be watched. With support from marriage season in India that generates strong demand, gold is expected to encounter range-bound trading for a while. The upcoming debt ceiling debate in the US needs to be watched.

The world silver market fundamentals suggest surplus. No wonder, speculative positioning is low with Comex net fund length at its lowest since July 2012. But ETP holdings have exceeded 20,000 tonnes. As silver takes its cue from gold, and in the absence of a gold-led rally, silver too is likely to struggle for an upward traction, but is likely to find support from industrial demand at about $26/oz.

According to technical analysis, gold has broken below important support levels as it enters its worst seasonal period. The metal’s momentum is bearish. Resistance is seen at 1,555 and then at 1,520, while support is seen at 1,480 and 1,430.

Metals improving

The market last week saw some improvement over the multi-month lows reached in the previous week, on the back of a mixed macro environment that helped calm investors jitters but failed to sustain a rally.

On Friday, the metals ended on a soft note with copper and nickel down. On LME, Friday, aluminium closed at $1,819/tonne and copper $7,375 and nickel $15,783. A falling nickel price has led to weaker stainless steel prices and expectations of a further decline, commented an expert adding LME nickel stocks have continued to trend higher.

According to technical analysts, copper momentum is bullish, with resistance seen at $7,880 and $7,650 while support is seen at $7,630 and $7,220. Weekly charts paint a consistently bearish picture for base metals as they move toward lows seen in summer of last year, they added.

(This article was published on April 14, 2013)
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