Gold, silver rally will be short-lived; downside risks persist

Four weeks into the third quarter of the year, global commodity markets are still groping for direction.

A clutch of factors including demand and supply side issues, varying monetary policy stance of central banks, volatile exchange rates and geopolitics to name a few have created a sense of uncertainty.

There indeed are concerns over global growth.

In the coming months, communication from central banks especially in advanced economies will have a far reaching impact on commodity markets with potential effect on volatility.

At the same time, economic data support the expectation of stronger growth in the second half of the year in developed economies even as slowdown in China is a real risk.

How long and how far the Chinese authorities will tolerate the slowdown before taking action is still a key unknown.

Weakening Chinese activity is surely negative for metal commodity prices.

Be that as it may, global commodity prices in the first half of 2013 were at best choppy.

The broad-based gains of the first quarter were surrendered in the second quarter indicating clearly that liquidity-driven commodity price boom of recent years is nearing its end.

The stance of the US Federal Reserve, when and how tapering will begin will be a key determinant of commodity prices in the coming months.

In the third quarter, it is anticipated that prices will stay under pressure in the wake of muted fundamentals and a weaker Chinese growth outlook.

At the same time, crude, select base metals and industrially-oriented precious metals prove to be exceptions.

Last week witnessed mixed performance in the world commodity markets.

Gold prices rose on a short-covering rally sparked by more dovish-than-expected comments from the Fed, a weaker dollar and US Treasuries easing, commented an expert, adding the upward momentum in crude oil prices stalled as concerns over demand growth outweighed potential supply-side risks.

Over the week, all precious metals, except palladium, gained.

Gold was up 2.7 per cent, silver was up by 3.1 per cent, while platinum ended marginally higher.

Palladium was down 1.6 per cent as was oil WTI down 3.1 per cent.

Among base metals, nickel performed poorly with a loss of 2.2 per cent, aluminium lost 1.9 per cent and copper 0.9 per cent, while tin and lead ended in the positive territory.

Gold: A short-covering rally saw prices stay well above the $1,300 an ounce mark.

In London Friday, gold PM Fix was $1,331/oz, up from the previous day’s $1,326/oz.

Silver did not lag behind with Friday AM Fix of $20.02/oz versus previous day’s $19.91/oz.

However, platinum ended weaker on Friday at $1,428/oz ($1,443/oz) and palladium $731/oz (($743/oz) because of disappointment over no announcement of further production cuts by major miners.

The price differential between gold and platinum remained close to $100 an ounce with the latter enjoying a premium. Outflows from gold and silver ETPs continue but have slowed down considerably.

In gold, the net redemptions so far this year are an estimated 630 tonnes.

Additionally, the third quarter is a seasonally weak demand period, especially in major markets such as India.

The Indian government is keen to ensure that gold imports are brought under fuller control to address the current account deficit.

In any case, with utter lack of confidence among investors in gold’s future price performance (read, price gains), speculative imports will surely decline; and the numbers are showing.

The timing and expectation around Fed tapering will be most impactful for gold and silver prices, according to experts.

Gold and silver prices continue to be vulnerable to downside risks.

The recent upward momentum will soon taper-off.

Gold prices run the risk of falling below $1,300/oz and towards the $1,250/oz area first and then test $1,200/oz this quarter.

A sizeable quantity of silver in the physically-backed ETPs is still cash negative and outflows will hurt prices further.

The one silver lining is that central banks have remained net buyers of gold in the first half of this year; but of late their pace of purchase has slowed.

That central banks were net buyers in H1 was positive, but will it continue? Doubts persist.

According to technical analysts, gold momentum is bearish.

The metal faces resistance at $1,372 and then at $1,350 while support is seen $1,300 and $1,270.

As for platinum, dips within range provide opportunities to buy. A move above $1,475 area would target stronger resistance near $1,540.

Base metals: Serious concerns over Chinese manufacturing cuts that would result in lower industrial metals demand have weighed on the market.

On Friday, LME cash aluminium closed at $1,750/t (down 1.6 per cent) and copper $6,848/t (down 2.1 per cent).

Without doubt, the implications of slowing Chinese demand are likely to dominate the base metals market sentiment in the coming months.

According to technical analysis, copper momentum is bearish.

Resistance is seen at $7,120 and then at $7,035 while support may be available at $6,835 and then $6,600.

Copper runs the risk of going toward the $6,750 area and then to range lows near $6,600.

Crude: Recent rise in oil prices may not hold for long as weak demand caps the upside.

At the same time, oil prices will be supported by seasonal pickup in demand in the third quarter. Brent crude may average $107 a barrel in Q3.

Demand in key consumption markets such as China may slow in the coming months as currencies depreciate against the US dollar making oil imports so much more expensive in local currencies.

Technically, the near-term downside risk to WTI is seen toward $103 and then potentially the $102 area, before signs of a base appear.

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