Agri Business

Precious metals caught in a vortex

G Chandrashekhar | Updated on September 12, 2018 Published on September 12, 2018

The precious metals market finds itself precariously poised. While gold continues to be under pressure with prices once again falling below the psychological $1,200 an ounce, silver has all but collapsed, touching $14 an ounce.

Several reasons have combined in this fall — a firmer US dollar, higher bond yields and importantly a rising US stock market. ETF outflows have also weighed on gold. Less committed gold bulls are exiting to move to the stock market. The inverse relationship between gold and aforesaid factors is well known. In other words, we are today in a ‘risk on’ market. The risk appetite is high and therefore, the role of a safe haven is limited.

Silver prices have been dragged down not only because they cling to the coattails of gold, but also because lower base metal rates continue to weigh heavily. Industrial metal prices have come under pressure because of signs of a slowdown in China as also the prospect of further US tariffs on Chinese goods to the extent of $200 billion.

e-impact

Although briefly, silver’s recent fall below $14/oz (the lowest level since January 2016) means there will be follow-up technical selling too. Use of silver in the electronics industry is well known and is estimated at about 20 per cent. Electronics have been a target of US tariffs, raising concerns about future demand. As a result of these pressures, the gold/silver ratio has climbed to nearly 85, its highest level in over 23 years, said an expert.

As for other precious metals with industrial usage, car sales in China and Western Europe have tuned weak, pressuring platinum and palladium. Reports suggest the slowdown in China is beginning to take a toll on many consumers who have turned cautious about making high value purchases. The ongoing trade dispute with the US too seems to be weighing on consumer sentiment.

The platinum market remains significantly oversupplied. On September 7, platinum was trading at $777/oz, having fallen from $826/oz a month earlier. Palladium too is under downward pressure.

The demand side especially for gold continues to be lacklustre . There is a slowdown in imports into China and India, although in the case of the latter imports have picked up in July and August because of seasonal factors. There may be a slight pick-up in physical sales in India because of the upcoming festival season.

Rupee factor

However, rural incomes are not expected to show a robust increase in coming months. The rapidly depreciating rupee has made the yellow metal much more expensive and neutralised the benefit of the price fall in the international market in dollar terms. The rupee continues to face headwinds. Looking ahead, the US economy looks strong with the non-farm payrolls data surprising on the upside. The labour market is tightening. This means, the Federal Reserve is likely to hike interest rates once again at the upcoming FOMC meeting on September 26. This is sure to lead to further firming up of the dollar, though the impact on gold and silver may be limited as the rate hike is largely priced into the market.

The writer is a policy commentator and commodities market specialist. Views are personal

Published on September 12, 2018
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