Gold and silver prices drift lower; more correction likely

G. Chandrashekhar Mumbai | Updated on July 12, 2011

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Buffeted by a combination of reasons, broad-based declines in global market commodity prices were last week's prominent feature.

Choppy conditions resulted primarily from risk aversion that followed renewed concerns over slowing macroeconomic growth momentum, in addition to uncertainties over sovereign debt risk in Europe. The dollar turned firmer; and rather unexpectedly, the International Energy Agency (IEA) announced release of 60 million barrels of oil from its strategic petroleum reserves over 30 days as part of response to Libyan supply disruptions. Crude and metals witnessed sell-offs as demand side concerns came to the fore.

On the positive side, the US Durable goods orders were better than expected in May. The data should shore up expectations for equipment spending in 2Q in the US and paint a better picture for manufacturing than suggested by the recent leading indicators, commented an expert.

While there is divergence of opinion about how global commodity market events would unfold in the coming days and weeks, what is clear is that demand-supply fundamentals will start to assert again. Caution is necessary to ensure that one does not get carried away by the latest events and become overly bearish.

For instance, the announcement of 60 million barrel oil release will no doubt have a price impact in the short-term; however, once the effect wanes, the upward pressure on prices will resume. The same applies for metals like copper.

Gold: A firmer dollar pushed precious metals down on Friday. In London, gold PM Fix for Friday was $1,515 an ounce, down 0.5 per cent from the previous day's $1,523/oz. Silver tumbled to AM Fix of $34.73/oz, down 3.6 per cent from the previous day's $36.01/oz.

It is important to remember that despite all the supportive factors in recent weeks, the yellow metal stayed trapped in low 1500s; and less committed longs rushed to sell off at a slight provocation. Silver's volatile behaviour is much less surprising because of the known surplus for the year and outflows from ETPs.

As for gold, the official sector sales have been considerably less, while central bank buying has become a regular feature. Every price dip thus turns into a buying opportunity in the physical market. That said, investor interest is the key; and if for any reason such interest wanes, prices would come in for strong correction.

According to technical analysts, in the short-term, a close below 1511 would take gold prices near the 1462 range lows. In silver, a break below 34.42 range lows would signal move towards 33.70 where it could find support. In the medium-term, both metals look bullish.

Base metals: The complex showed mixed performance last week. Copper showed a modest fall (0.5 per cent week-on-week) while lead, nickel and zinc gained. Lead and nickel saw small gains in open interest through the week, while the drop in zinc open interest coupled with rising prices suggested short covering, an expert commented.

Clearly, demand side concerns are dictating short term price direction. On the other hand, the supply side issues seem to be diverse. There are supply related problems that are not yet reflecting in price action. Copper continues to face headwinds in terms of mine supply. The world's largest lead-only mine is closed.

Aluminium production risks disruption because of China's power supply problems. Nickel supply outlook is improving. In zinc, production is growing, market is in surplus and stocks are building. In the medium term, price behaviour will reflect these fundamentals.

According to technical analysts, further decline through the 2465 range lows in aluminium would confirm a deeper fall toward 2260/70. Copper is likely to stay within the 8865-9280 range. Above 9410 would turn bullish for 9640. The medium term outlook is bullish.

Crude: After the IEA announced release of 60 million barrels over 30 days, the market drifted lower. The price decline has no doubt sent out bearish signals; but a closer at the market fundamentals would suggest the effect would be temporary. Questions are being raised about the timing of the announcement.

Technical analysts say that Brent is testing the range lows in the 105 area. A clear break below that would target 102/100 support area next. In WTI, a close below 90 would signal further downside towards 87. Medium term outlook is bullish.

Published on June 26, 2011

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