Gold demand may surge on good crop prospects, wedding season

In a week of interesting developments, even as the OECD composite leading indicators continued to point to moderate improvement in growth in most major advanced economies, and in particular, firming economic growth in the US, Japan and the UK, but stabilising or slowing momentum in large emerging economies, commodity markets in general and the metals complex in particular, perked up with prices trending higher.

Oil, too, firmed but more for reasons of geopolitical uncertainties once again threatening supplies from the West Asia and North Africa region.

The recent US fiscal data and jobless claims have again raised expectations of Fed tapering anytime soon.

At the same time, slower economic performance and weaker outlook for the major emerging markets have been of concern, albeit somewhat understated. Yet, many analysts believe, the adverse demand effects of slowing emerging markets will be partly neutralised by growing signs of demand pick up in the US and Eurozone.

However, currency gyrations are a factor to watch for as they will be an important driver of investment returns in the coming month or two.

Again, expectation of the dollar strengthening will mean downward pressure on commodity prices, especially the metals sector covering precious and base metals.

Market fundamentals will start to assert themselves.

In the event, the market may witness a diversified and differentiated price performance across commodities in the coming months.

“An uncertain demand outlook, volatile spreads and supply strength all call for an investment strategy that is active and takes into account a rather dynamic, shifting and challenging investment landscape”, observed an analyst.

In London, metals prices had a positive Friday and a positive week. Silver was an outstanding performer with price gain of a whopping 12.4 per cent over the week, while gold gained 4.6 per cent. Platinum and palladium saw less-pronounced price appreciation of 2.1 per cent and 3.1 per cent respectively.

Among base metals, aluminium and lead outperformed with week-on-week gains of 4.0 and 3.5 per cent respectively, with zinc not far behind with 3.3 per cent. Nickel 2.2 per cent and copper 1.6 per cent were other gainers, while tin was down. Oil WTI was up 1.3 per cent.

Gold: Precious metals were boosted last week by a weaker dollar and weaker equity markets. On Friday in London, gold PM Fix was $1,369 an ounce, rising from $1,330 the previous day. Silver of course stunned with Friday AM Fix of $22.83 versus the previous day’s $22.00. Not to be left behind, platinum closed at $1,524 ($1,504) and palladium $762 ($746). with this, platinum’s premium over gold has crossed $150.

Notwithstanding the recent rally, attributed mostly to short covering, it must be stated that both gold and silver lack fundamental support.

World silver market is in a state of surplus. But at lower prices investors have seen a good buying opportunity as is evidenced by inflow of over 500 tonnes last month into Silver ETPs.

On the other hand, there has been an outflow of about 21 tonnes from gold ETPs.

According to demand trends report released by World Gold Council, there was a decline in scrap supply in Q2 while jewellery demand along with bar and coin demand rose strongly. Central banks are expected to continue to be net buyers this year. Clearly, strong physical market support is necessary for gold prices to stay where they are at present.

But in the world’s largest market India, the government has announced further curbs. Customs duty on imported gold and silver has been hiked to 10 per cent ad valorem from eight per cent and six per cent respectively. A few other exchange control measures have also been initiated. Analysts tracking gold movement believe India imported as much as 600 tonnes in the first half of 2013.

Silver imports too have risen strongly. The government is keen to curb gold and silver imports which are seen as non-essential and a drain on scarce foreign exchange.

Whether these restrictions will have any impact on demand is uncertain. With further depreciation of the rupee and rally in dollar price of gold last week, domestic prices of gold have crossed the psychological Rs 30,000 for 10-grams mark, a clear increase of over 10 per cent from its recent low. With approaching harvest, good crop prospects and wedding season, demand for the yellow metal is likely to surge. The benefit of a fall in dollar price of gold is unlikely to be available to Indian consumers because of a substantially weak local currency.

According to technical analysis, gold momentum looks bullish. Resistance is seen at $1,400 and $1,440, while support may be available at $1,340 and then $1,310. Last week, was particularly good for silver; and the trend may continue. The metal may outperform further and see higher highs with gold.

Crude: Geopolitical issues have again taken centrestage. Intensified threat to oil supplies in the West Asia and North Africa region triggered by escalating tension in Egypt and surrounding areas is a key factor to watch in the oil market. Even though there is the potential for softness in physical crude market, potential supply losses may keep prices well supported.

Base metals: On the LME on Friday, cash copper closed at $7,372/t while aluminium closed at a recent high of $1,899. Improved demand prospects should boost the sentiment and provide a higher traction to prices. Concerns over slowdown in China may be substantially offset by improved outlook in the advanced economies.

Technically, copper momentum looks bullish. Resistance is seen at $7,535 and $7,425 while support is seen at $7,270 and then $7,200.

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