Gold weakens over lack of monetary easing; US jobs data boost base metals

For the global commodity markets, after a broad easing of prices over much of last week following disappointing development in the form of Fed and ECB policy action (rather, non-action), Friday provided the much-needed relief in the form of positive US job numbers.

Data showed in July that the US employers had hired the most workers in five months. Non-farm payrolls rose by 1,63,000 last month beating market expectations of 1,00,000 new jobs. A shot in the arm, the markets took immediate cognizance of this positive development.

Otherwise, July was another month of general weakness in commodity prices – especially base metals and precious metals – resulting from muted demand around the world driven mainly by China’s lower imports.

Economic concerns have been on the rise in recent weeks as a result of which prices of some commodities have declined to levels seen last in 2009-2010.

Week-on-week, prices of all metals mainly base and precious metals fell. While gold and silver were down by 1.0 per cent and 1.7 per cent respectively, aluminium pared down by 2.0 per cent and copper by 1.5 per cent.

Even grain prices pulled back from their recent record highs, but expectations of further supply downgrades are likely to keep the market buoyant. A massive power grid failure in northern India that plunged half of the country into darkness attracted international attention focusing on imminent escalation in the country’s diesel demand.

Clearly, the US Fed and ECB did not meet the anticipations of the financial market players. The positive US jobs data are expected to boost growth-oriented commodities such as energy and base metals while further softening the investment demand for traditional safe haven assets such as gold. Otherwise, the overall global macroeconomic sentiment is still weak. Sustained flow of positive macro data is necessary for the tide to turn.

Gold: Last week, gold prices fell below the psychological $1,600 an ounce after the FOMC and ECB briefing disappointed. The absence of further monetary stimulus from the Fed pressured all precious metals prices down. On Friday, London gold PM Fix was at $1,602/oz, slightly up from the previous day’s $1,597/oz. Silver was down on Friday to AM Fix of $27.25/oz versus the previous day’s $27.42/oz.

Many are now looking forward to the September FOMC meeting which is likely to be a near-term decision point that could drive prices higher. However, if the US macro data were to show signs of improvement as did the latest non-farm payroll, the Fed may still hold-off any decision on further quantitative easing. That would be truly disappointing for the gold bulls.

The price direction for gold is clearly in the hands of the physical market where demand, if anything, is muted. Near-drought conditions in India and risk of food inflation combined with a weak rupee that has denied the benefit of lower dollar prices to Indian consumers is sure to result in demand compression. Prices are likely to stay range-bound and biased to the downside as the upside triggers are absent at this point of time. According to technical analysts, any bullish view of gold is underpinned by the 1,522 range lows. A move above 1,640 would confirm upside toward 1,700 area. Meanwhile, lower lows and lower highs in precious group metals keep the downside vulnerable. The medium-term outlook is neutral.

Base metals: Although over the week, prices fell as outcome of the Fed and the ECB meetings, the complex buoyed on Friday with positive US non-farm payrolls data.

Tin and nickel prices were the strongest performers up 2.7 per cent and 2.3 per cent respectively. Copper prices lagged the rest of the complex closing up 1.5 per cent following a 7,000 tonne build in Shanghai exchange warehouses. On LME, Friday copper closed at $7,441/t and aluminium $1,826/t.

The price dynamics in the base metals complex continue to reflect the impact of bearish macro sentiment, albeit punctured by brief short-covering rallies, an expert remarked. Weakness in manufacturing confidence and disappointing policy outcomes in key central bank meetings has created an environment of risk aversion.

Currently, there are no anticipated triggers for the prices to decisively move a leg higher. Tight supply conditions in copper and tin limit the downside.

There is expectation of improvement in economic activity in the second half of the year. If that materialises and end-demand improves, then one can expect some price recovery in the last quarter of the calendar year. The market is impacted more by non-fundamental factors.

According to technical analysts, below 7,215 in copper and 1,828 in aluminium would signal downside extension toward 7,100 and 1,776 respectively. Nickel has broken lower to conform to general bearish view for base metals and targets the 13,000 area. Medium-term outlook is bearish.

Crude: Over the week prices have remained largely unchanged as the macro sentiment and monetary policy action were not supportive. However, demand data especially that of the US are seen turning supportive. The market needs sustained flow of positive macroeconomic and demand data for prices to rise higher.

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