Gold asserts haven status, may rise further

G. Chandrashekhar Mumbai | Updated on March 12, 2018

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Uncertainty following the ongoing political turmoil in the MENA (Middle East North Africa) region has resulted in volatile and choppy conditions across global commodity markets in recent days. Developments in Libya are being closely monitored. To be sure, oil prices have moved up sharply over the week. Similarly, gold and silver have extended their gains because of their safe haven status. However, base metals and agricultural markets have come under pressure from the prevailing environment of risk aversion.

As universal intermediates, oil is a critical driver of economic growth. Oil price spikes are usually accompanied by spikes in prices of other growth-oriented commodities like copper, and indirectly affect agricultural crops. Eventually of course, high oil prices lead to inflation, restraint in demand growth and price correction, experts pointed out. Geopolitical events have pushed into the background the positive effects of favourable macro-data that strongly signal growth. Whether crude demand or steel production, the prospects are increasingly turning brighter. Commodity fundamentals will begin to assert at some stage. One can expect demand driven commodity price spikes in the coming months. As growth signals get stronger and equity market improves, investors will migrate from gold and silver, leading to a sharp correction. The big question relates to the timing of the event. Be watchful.

Gold: Right now, there is flight to safety. Geopolitical tensions, rapidly rising crude, concerns over slowdown in demand, weaker dollar and weaker equity market have combined to propel gold and silver trading. Prices extended their gains over the week with gold racing towards all-time high and silver to 30-year highs. On Friday, prices eased a little. In London, gold PM Fix was at $1,403 an ounce, down 0.6 per cent from the previous day's $1,412/oz. Silver lost 2.2 per cent with Friday AM Fix at $32.54/oz as compared with the previous day's $33.28/oz.

The charged geopolitical conditions in the MENA region and other circumstances such as easy money policy, low interest rate, inflation expectations and risk aversion among investors are likely to prove positive for gold and silver in the period ahead. There is every likely gold prices would touch new highs this year with long-term investment demand intact and emergence of physical demand upon price dips. Silver is sure to remain volatile because of the large surplus; but would continue to track gold in any case.

According to technical analysts, gold is oscillating around the bull flag trigger in the 1410 area. There is reason to remain bullish. One can expect a clear break over there to confirm gains through the all-time high at 1432 towards the next target of 1460 and then the 1500 area. Silver, on the other hand, is correcting lower off the 34.34 highs. Buying interest may emerge in the 31.26 area.

Base metals: The ongoing geopolitical instability in the MENA region and associated macroeconomic concerns have no doubt weighed on the complex over the past week. Admittedly, it is rather difficult to predict what shape the geopolitical developments will take or whether they will affect broader macroeconomic performance. It is in this context that the recent price dips are seen as opportunity for buying. China the world's largest consumer of base metals has been continually tightening credit which has caused some concern about demand growth. The inevitable restocking demand from China is yet to take off. Nickel perhaps is a forerunner. LME stocks are declining with improved demand. At present, nickel has the potential to outperform other base metals.

Copper is a very tight market this year and it is only a matter of time before the upward price journey commences again. On Friday, copper price rebounded strongly to $ 9,766 a tonne with price rally continuing after the close in London, ably supported by fall in exchange stocks at Shanghai over the week. Demand growth in industrial countries and Chinese demand (albeit slow) are positive for a market that is seen in deficit. Two physical copper ETFs over the next 2-3 months would also be supportive of a bullish view. At Shanghai, aluminium stocks too declined and the trend is likely to continue for 2-3 months, experts remarked adding that the possibility of China selling its aluminium stocks may arise when price rises further. As for zinc, demand has rebounded from recession as evidenced by rise in galvanised steel production, the main market for the base metal. However, credit restrictions in China could soon begin to bite. According to technical analysts, a base may be in place for copper near 9300. A clear break over resistance in the 9700 area would encourage a bullish view. However, a break above the 9950 area may be necessary to confirm a test of the 10190 all-time high. Higher target is 10500.

Crude: The oil market outlook has become materially more bullish, assert experts as MENA region supply worries have turned into actual disruption of supplies. In the coming months, it should surprise none if oil prices accelerate to new all-time highs. The high was $147 a barrel recorded in mid-2008. Higher crude prices have the potential to lift other commodities too. For countries such as India largely dependent on imported oil, rising oil prices and their concomitant effects on other commodities including agriculture would prove to be highly inflationary.

Published on February 27, 2011

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