Gold struggles to gain upward traction

At a time when the overall growth sentiment is not robust, flow of positive macro data last week from some world’s significant economies – the US, Germany and China - was a matter of relief for the global commodity markets which have been concerned over the US fiscal cliff and suspected inventory build up in China, not to speak of geopolitical tensions, dollar strength and recovering equity market.

Although the entire metals complex was somewhat indifferent, base metals gained modestly over the week with nickel up 4.2 per cent, zinc 2.6 per cent and others slightly less.

The week proved positive for precious metals, with gold recording 1.2 per cent price gain, and silver 3.5 per cent. Palladium was the star performer for the second week in a row with a gain of 5.5 per cent reflecting a fundamentally tight market balance, and platinum 1.9 per cent.

Gold prices continue to trade at low $1,700s despite a favourable macro backdrop but fragile physical demand. On the other hand, crude market faced a volatile week amid tensions in the Gaza area.

China’s October trade data released last week provided a positive signal to the market. Crude imports surged 18 per cent year-on-year to 5.6 million barrels a day. Coal imports too were higher. Weakness in precious metals import seen in September continued into October.

As for agricultural commodities, the import appetite was mixed. While soyabean, soyaoil, sugar and wheat imports eased month on month, imports of palm oil, cotton, corn, cocoa and coffee increased.

The backdrop to global commodity market covering energy, metals and agriculture still continues to be underpinned by geopolitical tensions, dollar strength and European sovereign debt crisis, not to speak of the weather. The crude market is especially sensitive to potential supply disruption while base metals market is constantly looking at the demand side.

Gold prices continue to be dictated by a host of positive and negative factors. The picture is quite complex; and clarity will emerge only if there is a sustained flow of positive macro data.

Gold: Despite a positive global macro backdrop, gold prices have struggled to gain upward traction, having been trapped in the low $1,700s. On Friday, in London, gold PM Fix was $1,735 an ounce, marginally up from the previous day’s $1,731/oz.

Silver was up too with Friday AM Fix at $33.41/oz versus the previous day’s $33.29/oz.

The physical demand has been fragile despite high season in the world’s largest market, India. More restrictions have been imposed on commercial banks for gold financing.

World silver market is forecast to be in a state of surplus during 2012 with GFMS estimating the surplus at 7,500 tonnes to be absorbed by investment as compared with lower surplus projected by some analysts. The surplus is the result of higher mine output and softer overall demand.

Base metals: The entire complex has been facing uncertain conditions for some time now. With global growth slowing, European debt issues far resolved and now the threat of US fiscal cliff, there is less conviction in the marketplace. Concerns over China have likely given way to cautious optimism especially with the new political leadership indicating continued reforms. Investor interest too is tepid as reflected in positioning. Aluminium and zinc show net short according to CFTC data. Lead is modest net long.

For the base metals complex to see some positive price movement, the world needs sustained flow of positive macro economic data. Until then uncertainties will continue. Fundamentals of metals such as aluminium are not price supportive. Rising cost of production will of course add to the price pressure.

Crude: Front month oil prices saw a volatile week in the wake of geopolitical developments. Although fundamentally the market is fairly balanced, thereat of supply disruption continues to loom large. In other words, the upside risks to prices are more than downside risks.

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