Gold leashed; but speculative interest rising

After taking stock of the devastating effects of tsunami and earthquake that struck Japan, global commodity markets have returned to closely examine other drivers such as tightening monetary policy and effects of high crude prices. China's central bank announced a further 50 basis points (bps) hike with effect from March 25, strongly signalling intent to maintain tight monetary policy. On March 17, India tightened bank credit by 25 bps.

While Japan's quake left varying impact on commodities, uranium is seen the worst affected both short-term and long-term. Prices have already declined from $72-73 per pound to $57-62/lb because of the twin effect of loss of demand from Japan and the US announcement of 450-tonne Uranium sale next two years. At the mid-50s level, Chinese demand can be expected, experts asserted.

Gold: After plunging below $1,400 an ounce following profit taking or sell-off triggered by margin calls elsewhere, the yellow metal regained traction towards the end of last week to settle higher. In London on Friday, the PM Fix was at $1420/oz, up 1.2 per cent from the previous day's $1,404/oz. After easing from the 31-year high, silver too moved in tandem with gold, with Friday AM Fix at $35.15/oz, up 2 per cent from the previous day's $34.47/oz. The price of $1,400/oz is proving to be good support for the yellow metal as physical demand resurfaces. Demand is seen emerging, especially in Asia, on price dips. Longer-term investor interest is seen stabilising. The broad market uncertainty is likely to support investor interest in gold; but silver is likely to remain volatile given its weak fundamentals.

To be sure, speculative interest in gold has turned positive due to political turmoil as reflected in non-commercial long positions in Comex gold having returned to their highest level since the beginning of the year. Fresh longs have been re-established and gross short positions covered. Indian market, while taking cue from overseas, is groping for direction. Despite favourable conditions – easy money, geopolitical instabilities and high crude prices – the precious metal has remained leashed. The downside risk to prices comes from equity markets on whose improvement, gold will see a strong correction.

Base metals: Last week, lead was the standout performer in the global market with a gain of over 10 per cent to about $2,700 a tonne. Nickel market fundamentals are seen improving with LME stocks declining fast and physical premium improving. Tin and copper are actually in deficit; but it may take some time for prices to reflect the tightness. The effects of Japanese earthquake on base metals complex are seen mixed. Lead is likely to be in greater demand from the generators and batteries sector. When the reconstruction activity commences, aluminium, copper and zinc should benefit.

Crude: With the situation in Libya turning increasingly complex and unpredictable, the oil market is bracing itself for prolonged uncertainty. Once Japan's worst demand losses are over and economic activity resumes, oil demand will receive further support. While there will be short-term demand loss, in the longer-term Japanese oil demand is expected to expand. One can well imagine the price implication of these anticipated developments.

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