Gold, silver poised to go up as investors bet on safe haven

Global commodity markets have taken cognisance of the continuing credit tightening cycle by major consuming economies. The latest was in Europe last week where the ECB raised the policy refinance rate by 25 bps to 1.50 per cent. This followed a similar hike in April. Also, earlier last week (Wednesday), the People's Bank of China raised the policy rates by 25 bps, making it the fifth time in the current cycle. For the Asian major, inflation control is top priority. One can expect the tightening cycle to continue for a while. Last Friday, the US released disappointing non-farm payrolls.

Despite the rate hikes, commodity prices generally moved higher during the week. Oil prices have firmed. Of course, macroeconomic concerns continue to influence base metals price movements; yet, the complex generally moved higher over the week spurred by positive expectations from China. Gold and silver showed robust price performance.

Amid reports of production reaching record new high in June, Chinese steel prices edged higher last week, despite the rate hike. There is general belief that the commodity markets are shrugging off the growth concerns witnessed in June when prices eased. However, the situation is certainly less-disconcerting currently. Fears over Chinese slowdown are abating, while Japan begins its revival. The US and Europe are likely to continue to move steadily along the growth path. As the market moves through the third quarter of the year and macroeconomic concerns further abate, fundamentals will start asserting themselves. So, the pricing environment is likely to turn healthy for producers and investors.

From India, preliminary iron ore export data for June showed shipments of 4.22 million tons (equivalent to 51 mt annualised), down 22 per cent year-on-year and 54 per cent month-on-month as the monsoon impacted shipment. This is the thirteenth consecutive month of year-on-year losses, while year-to-date cumulative export losses have now reached 15 mt year-on-year, more than was lost in the whole of last year, Macquarie Commodities Research pointed out in a report.

“The over-reliance on Goa is now being exposed by the monsoon, with West Coast exports down 69 per cent month-on-month,” the report commented adding that the iron ore market fundamentals will remain extremely tight with export shipments likely to remain subdued until October and with Chinese mill inventories low.

So, uncertainties galore in the global commodity market especially from the supply side. The demand side appears healthy on current reckoning.

Gold: Amid a supportive environment — interest rate hikes, uncertainty over European sovereign debt and less robust macro data — bullion prices have extended their gains.

On Friday, in London, gold PM Fix was at $ 1542 an ounce, up 0.9 per cent from the previous day's $1,528/oz. Silver followed suit with Friday AM Fix at $ 36.28/oz, up 1.2 per cent from the previous day's $ 35.86/oz.

Despite seasonal demand weakness, the external environment continues to be gold supportive. As investor interest is the key driver of the market, in the unlikely event of such interest waning, prices could be subject to correction, albeit temporary. At every price fall, physical demand will emerge.

Silver continues to be vulnerable because of weak fundamentals. ETP outflows have been hefty. Prices have struggled to retain upward momentum. The US dollar continues its weak streak barring occasional firming. According to technical analysts, after gold has reached 1,542, one can look for an extension towards the 1,558 range highs. Silver too has scope to move towards 37.40. The medium-term outlook is bullish.

Base metals: Globally, base metals sold-off on Friday as June US non-farm payrolls disappointed. LME cash closing for copper was $ 9,644 a tonne on Friday, down from the previous day's $ 9,724/t. However, over the week, the major metals, barring zinc, were up with confidence about Chinese economy improving.

The emerging environment of slowly rising confidence about economic growth, lessened concerns about European debt and Chinese slowdown create a positive sentiment for the complex. Global auto sector will pick up with Japan's recovery. Amid this scenario, supply side issues can cause upside price risks. For instance, copper mine production is much less than expected, while Chinese demand is sure to pick up sooner rather than later.

In the second half of the year, copper and tin prices are expected to recover strongly. Currently, aluminium prices are well supported by global demand growth; but we cannot discount the rising cost of production through higher energy prices.

Power rationing in China is a threat to production. Lead supplies are highly uncertain as the world's largest lead mine may close for an extended period of time, while demand will emerge from the auto battery sector.

According to technical analysts, the downturn in aluminium is expected to find buying interest ahead of the 2,450 lows, keeping the range trade in play. While copper affords bullish expectations, buying on dips towards 9,400 area would make sense as the metal moves towards the next higher target of 9,830 and then 10,000 area. Medium term outlook is bullish.

Crude: Prices - Brent and WTI - firmed last week on supply side concerns and constructive demand and inventory data. If macro concerns worsen, the market risks a retreat. Technical picture suggests that with Brent crude in the 120 area, one must look for a dip towards 113. The medium-term outlook is bullish.

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