Gold, silver firm up on Cyprus imbroglio

The global markets are poised with signs of recovery in economic activity growing stronger as reflected in the recovery in investor appetite; but the risk-on environment has not yet begun to help commodity markets as evidenced by price performance.

However, financial crisis that unfolded in Cyprus and issues relating to bail-out engaged everyone’s attention.

Last week, global commodity markets witnessed mixed performance. In particular, the precious metals complex showed mixed trend. Following the events in Cyprus, gold and silver prices firmed up as uncertainty drove investors toward the safe haven asset.

Gold gained 0.8 per cent over the week to move past the $1,600 an ounce mark to a 5-week high triggered by a short-covering rally while silver gained 0.5 per cent.

The worst performer palladium lost 2.6 per cent in value and platinum declined by 0.8 per cent. The base metals complex and crude oil prices came under pressure.

The front-month Brent contract hit a three-month low as fundamentals took a backseat but continued to provide support on the downside.

The base metals complex was generally down with tin losing 3.9 per cent in value, but nickel was up 1.5 per cent and zinc 0.2 per cent. However, on Friday, LME metals prices had a stronger close to the week as the Cyprus macro oscillator which outweighed fundamentals moved back towards increased confidence of a resolution.

While European macro events will continue to impact metals market, China, arguably the mover and shaker of the world commodities market, is showing signs of some improvement, although February data released last week were less-inspiring. Oil, base metals and precious metals imports were down.

From an investor standpoint, currently, equities seem to be a safer bet and commodities much less.

At the same time, the growth outlook is still not strong enough for growth-driven commodities such as some base metals and energy products to rally. The world needs sustained flow of positive macro data to generate confidence that growth is back and will be sustained.

Until then, markets are likely to trade sideways with economic and political issues, rather than fundamentals, dominating the sentiment.

Precious metals

At a time when the yellow metal was losing its safe haven appeal and prices declined below $1,600/oz, the bail-out package for Cyprus to address its financial woes in turn became a bailout package for gold itself.

Gold prices spurted over the week. In London, on Friday, the gold PM Fix was $1,608/oz down from the previous day’s $1,614/oz.

Silver bucked the trend with Friday AM Fix at $29.06/oz versus previous day’s $28.91/oz.

Platinum and palladium too closed lower on Friday at $1,580/oz and $754/oz respectively. Softer physical demand, stronger dollar and continued outflow from ETPs have combined to pressure gold down. But for the short-term blip in prices following the Cyprus event, conviction in gold has been lost and investors are selling. Other asset classes, especially equities, look more attractive.

If one were to take a view for the next 3-6 months, the sentiment is weak. The metal faces important upside hurdles. However, prices will face an upside risk if financial optimism fades; but, for the time being, investor fatigue has capped the upside. Many forecasters are already reducing the outlook for gold prices for the rest of the year and some suggest price declines to $1,500/oz.

According to technical analysts, gold will face resistance first at 1,665 and then at 1,625 while support is seen at 1,600 and 1,575. A move above the 1,620/25 area is needed to signal further upside toward 1,660 and prevent slippage through 1,600.

From an Indian perspective, whether the benefit of fall in gold prices denominated in dollars will be available for Indian consumers will depend on how the rupee behaves.

If the rupee depreciates faster than the pace of decline in dollar price of gold, the benefit will not be available. Also, the Indian policy-makers are constantly exploring options to curb gold import and consumption.

Base metals

Prices in the complex generally came off last week as macro tail risk concerns mounted in relation to the Cyprus bail-out. In the short-term, this is likely to drive performance. However, China is showing signs of improved performance even as anecdotal evidence suggests increased buying.

On the LME last week, aluminium closed at $1,915 a tonne, copper at $7,662/t and nickel 17,084/t. Exchange inventories of copper have expanded in recent months across Asian, European and US warehouses.

The market has turned cautious not because of a surge in mine supply but more because of sluggish demand, commented an expert. According to technical analysts, copper is set to face resistance first at 7,880 and then at 7,750 while support is seen at 7,565 and 7,485.

“Base metals are testing important supports. Below 7,485 in copper would signal lower toward the 7,220 range lows”, said an analyst.

Crude

The front-month Brent contract hit a fresh three-month low last week even as fundamentals have taken a backseat but continue to provide support by slowing the downside drift. Some analysts assert that prices are likely to gravitate toward $110-111 a barrel area once the current macro-economic headwinds fade. However, from a technical perspective, analysts expect further weakness in Brent crude toward 106 and potentially 104.

COMMENT NOW