Stronger equities, mighty $ may rob sheen off gold

In a major change from various uncertainties that marked 2013, towards the end of the year the vigour of many of the uncertainties had waned. Economic growth is clearly picking up momentum; geopolitical instabilities have somewhat subsided and decision on tapering has been made.

Importantly, global manufacturing confidence in the last two months 2013 was at its highest level since April 2011. Many believe this is sure to provide a positive platform for 2014.

For the global commodity market, it is time for funds to rebalance their portfolio. The rebalancing affects commodity markets because of changes in the composition of fund allocation for specific commodities. This week the S&P GSCI and the Dow-Jones UBS – two commodity indices with the most fund money linked to them – will begin their five-day annual rebalancing, in which commodity futures are bought and sold. It remains to be seen who the winners and the losers are.

It was a mixed beginning to the New Year for the entire metals complex as such. But without doubt, it was great beginning for the precious metals complex.

Over the week, prices of all precious metals spurted. Palladium was the best performer with a price gain of 2.4 per cent to close the week at $728 an ounce in the London market closely followed by platinum with a gain of 2.2 per cent to end the week on a new high of $1,404.

Recovery in European car sales continues, providing a fillip to the metals. Gold moved up by 1.6 per cent to stay well above $1,200 and silver gained 1.3 per cent to breach $20/oz level.

On the other hand, on LME last week, the base metals complex faced sharp price falls that led by tin with a 6 per cent decline followed by lead (-5.2 per cent).

Zinc and nickel prices were down 3.1 and 2.5 per cent respectively. Aluminium was down 2.1 per cent while copper moved down by 0.9 per cent. Oil WTI shed 6 per cent in value over the week. Improvement in the geopolitical situation has resulted in increased confidence over supplies.

In London, gold PM on Friday was $1,235/oz, up from the previous day’s $1,225. On Wednesday, the Fix was $1,202. Silver moved in tandem with Friday AM Fix at $20.18/oz versus the previous day’s $19.94.

Platinum ended the week at $1,404 ($1,388) extending its premium over the yellow metal.

From a fundamental perspective, little has changed for the gold market. If anything all the drivers are weak. The physical market is far from supportive.

India’s import volumes are unlikely to pick up anytime soon.

Prices have fallen below the psychological level of Rs 30,000 for 10 grams; yet demand is not robust. The dollar is set to firm up gradually pressuring commodity prices down in general.

With positive macro data flowing, equities too should begin to gain. The price risks for gold are to the downside.

The market for base metals in 2014 is likely to be supply-driven rather than demand-driven.

At the moment, there is no dearth of supplies and disruptions have possibly been factored in.

Steady flow of positive macro data will support prices; however, a potential source of concern is the rapidly rising government debt in China. This concern is sure to weigh on growth.

On Friday, LME cash copper closed at $7,331 and aluminium $1,727/tonne.

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