Gold stays vulnerable; silver bucks the trend

Global commodity prices have fallen rapidly in recent days with no exception. Crude, base metals and precious metals prices have moved south, triggering some kind of a panic in the market with participants wondering whether the world is moving towards a 2008 type situation. As an expert commented, the speed and extent of the recent price falls suggest that market participants may be expecting a severe deterioration in the macroeconomic outlook.

Whether or not the world will go into a recession is still a matter of conjecture. While falling prices make it attractive for commodity buyers -consumers, no one is sure if the bottom has been reached. Also, prices have not fallen low enough to prevent surpluses from emerging during a possible global recession; but surely, current prices are threatening investments in the future supply growth.

While the European situation is a matter of serious concern, everyone is watching Chinese data. If China has soft landing, commodity prices – especially metals prices – have a chance of a mild recovery. However, long-term gains will remain capped by developments in Europe, if leaders don’t succeed in finding a lasting solution.

Interestingly, commodity markets have taken a beating on a few occasions since the 2008 collapse on macroeconomic concerns, and often the price fall has happened in the second quarter of the year. It is for the third year in a row that Q2 has seen commodities test the medium-term support, an expert observed.

A matter of most serious concern is the European situation where many believe it could take several months for a permanent solution to emerge. As political uncertainties continue, demand takes a beating. This simply means the markets will continue to be vulnerable to the political and economic vicissitudes in Europe.

As markets face politico-economic headwinds, the sentiment in the oil market has worsened. Support signals from OPEC are lacking. An extension of the US Operation Twist has been a dampener pushing the safe haven gold well below

$1,600 an ounce. Base metals are not spared either. China’s trade data have raised some apprehensions and week-on-week, prices have fallen across the complex. The grains markets have been some kind of an exception with dry conditions in the US Midwest providing some support, despite weak outside markets.

Overall then, the macro picture will continue to drive the global commodity markets. In some cases such as crude and copper, the fundamentals are supportive. If gold has to regain its safe haven status, it must receive physical demand support. Importantly, the world needs sustained flow of positive macroeconomic data that alone can boost confidence.

Gold: Prices fell below the psychological $1,600/oz last week following Greek elections and FOMC meeting. Week-on-week, all precious metals, except silver, were down in London with gold losing 4.8 per cent, platinum 3.9 per cent and palladium 3.8 per cent. Bucking the trend, silver was up by a healthy 6.5 per cent.

In London on Friday, gold PM Fix was at $1,566/oz, down from the previous day’s $1,582/oz. Silver too followed suit with Friday AM Fix at $26.81/oz, down from $ 27.88/oz of the previous day.

Gold bulls are utterly disappointed as the US Fed stand meant nothing for the precious metal. The metal has to re-establish its safe haven status. The macro situation is still gold-supportive and ETP holdings have been resilient; but the physical market support is lacking. Major consuming markets such as India are facing demand compression due to record high prices resulting from rapid weakening of the rupee which has denied Indian consumers the benefit of fall in gold prices in dollar terms.

There is belief that for an extended period of time, gold prices will remain vulnerable to poor sentiment, risk aversion and tepid physical demand.

According to technical analysts, the range lows near 1,520 can be expected to underpin a move back towards the 1,640 area. It is advisable to buy on dips. The move below 26.75 in silver signals further downside toward 26.00 where signs of base may emerge. The medium term outlook is neutral.

Base metals: All base metals were down over the week (except zinc) with copper recording $7,317 a tonne and zinc $1,796/t LME cash on Friday. The demand side continues to look weak with the ongoing European crisis exacerbated by less-than-satisfactory Chinese trade data pulling prices down.

According to experts, in some cases, prices are now eating into industry costs, which have already driven supply cuts in aluminium and nickel. While that may provide some support, in the near-term downside risks to prices are still operating as European crisis is far from resolved. Chinese government policy supporting growth is of course a welcome measure; but it must quickly translate to import demand for prices to change direction.

Everyone is watching China for early signals of recovery in growth. Should that materialise, there will be potential upside to prices, especially of metals such as copper. That said, market participants must brace themselves for volatile conditions as uncertainties refuse to fade quickly.

The technical picture suggests a bearish view on copper with a break below support in the 7,230 area. The next downside targets are 7,100 and 6,950. Aluminium has reached near 1,860 and is likely to move down to 1,830. The medium-term outlook is bearish.

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