Gold loses haven status; sees waning investor interest

For a world burdened with weak growth sentiment for a protracted period of time, the US showing signs of revving up are a welcome relief. The US macro data provide a glimmer of hope. Financial conditions in the US continue to improve, gaining traction on private demand despite the fiscal consolidation.

Prospects remain depressed in the euro area with positive financial conditions offset by fiscal policy uncertainty and fragmentation, according to experts.

Yet, easy money, weak currencies and cheap valuations are supporting some of the markets, mainly equities. As for the Asia major, modest growth targets introduced at China’s annual National People’s Congress have raised concerns about the country’s commodities demand.

Going forward, market participants are likely to recognise that the days of cheap money or near-zero interest rate regime may inevitably come to an end soon. How soon that ‘soon’ will be, is, of course, anybody’s guess.

A safe expectation is that it would happen in the second half of the year, subject to continued flow of positive macro data. With the onset of risk-on environment, the propensity of investors migrating to the equities market is high. Evidence that it is happening is already available with surge in equities indices and decline in interest levels in safe haven assets like gold.

The second quarter of the calendar year is important from an agricultural market perspective too. Major origins in the northern hemisphere will soon enter the planting season.

Weather will play a crucial role. On current reckoning, the probability of a rebound in major agricultural crops (corn, wheat, oilseeds) is high, with resultant softer prices.

Gold: losing sheen

The market has continued to trade below $1,600 an ounce, struggling to gain upward traction. The downside risks to gold prices have only increased, while the robustness of upside triggers has receded.

A stronger dollar, firming equity markets, continued weak physical demand and lack of investor interest have combined to pressure the market down.

Substantial ETP outflows have added to the woes of die-hard gold bulls. ETP demand is usually perceived as a long-term stickier investment; and now, continued outflow from this sticky investment will accelerate the downside risks. February saw record redemptions of over 110 tonnes.

No wonder, many forecasters have begun to revise their gold price outlook for 2013 down. At the same time, it must be stated that macro uncertainties linger. The yellow metal’s haven appeal may possibly return in the backdrop of the US debt ceiling debate scheduled for May. In the absence of investor appetite, physical demand and official sector interest are likely to set the floor for prices.

As for silver, the market is in surplus. As an industrial metal, silver consumption demand is price inelastic. Therefore, the extent of investor interest is what determines volatility. If the metal follows gold in terms of waning investor interest, then the price performance runs the risk of a downside correction.

On the other hand, platinum and palladium retain a stronger fundamental backdrop. The upside potential for platinum stems from the upcoming biennial wage negotiations, according to experts who asserted that supply remains the key swing factor.

Metals: Better outlook

Although the recent sell-off across the complex generated some anxiety, there is belief that price declines have largely run their course. With prospects of improved activity, Q2 may witness a modest recovery in commodity prices. Copper supplies are improving, while nickel and aluminium markets are over-supplied.

According to technical analysts, copper is likely to face resistance at 7,930 and support at 7,720. One can look for lead to extend its outperformance relative to zinc, assert analysts.

Crude: robust demand

The April Brent contract has traded lower and the WTI-Brent spread narrowed to about $16 last week from the Q1 average of about $19. For Q2, analysts expect the spread will average $15. Demand conditions remain robust, especially with the oncoming driving season in the US. Despite modest growth targets and cautious macro policies unveiled recently, China’s oil demand is expected to grow five per cent in 2013. Concerns over geopolitical instabilities seem to have receded for the time being.

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