Gold’s haven appeal wanes as other assets become attractive

“Global economic activity is picking up, but the continuing crisis in the euro area is delaying a meaningful recovery,” the OECD said in its latest interim economic assessment. No wonder, in this atmosphere of cautiously creeping optimism the bulk of the price action across the commodities complex over the past week – truncated to four trading days – was sideways and range-bound.

Amid political uncertainty in Italy, banks reopening in Cyprus with capital controls, choppy equity markets and a stronger dollar, base metals prices remained under pressure, but front month Brent prices edged higher over the week testing the $110-111 a barrel level. On the other hand, gold which had reversed its downtrend following the bank crisis in Cyprus lost its momentum and struggled to gain traction, and eventually fell below the psychological $1,600 an ounce threshold.

Over the week, the precious metals complex faced mixed results. While gold was down 0.6 per cent and platinum was down by 0.3 per cent, silver was up 1.4 per cent and palladium 2.1 per cent.

As for agriculture, corn, soyabean and wheat prices slumped last week on expectation of improved stock and supplies following a bearish USDA report. Sugar stays bearish with poor price appreciation potential.

Gold: less glitter

The haven appeal that erupted after the Cyprus banking event is waning as reflected in steadily declining prices. In London, on Thursday, gold PM Fix was $1,598/oz, down from the previous day’s $1,603. Silver gained to move up to AM Fix of $28.64. Platinum trailed gold prices to close at $1,576 and palladium rose to $770.

Clearly, gold conviction has been lost even as investors are selling. Other asset classes look more attractive. Volume traded on the Shanghai Gold Exchange has picked up again with prices dipping below $1,600 suggesting that appetite to buy has become price-sensitive. Demand from India is lacklustre. Although prices have dipped below Rs 30,000 for 10 grams, physical buying has not picked up. Consumers are waiting for further fall in domestic prices. However, it may not materialise fully if the fall in dollar price is neutralised by a weakening of the rupee. Akshaya Trithiya festival in April may trigger some physical buying. With expectation of further price correction, the international gold market is likely to remain range-bound. In the near-term, physical market and central bank buying will support the downside. The yellow metal still misses a major catalyst for significant upward momentum. However, the main upside risk is if the current financial optimism fades.

According to technical analysts, gold momentum is bearish. Resistance is seen at 1665 and 1620, while support is seen at 1590 and 1575. Interestingly, the long-term trend signal is said to be still bullish as experts point out that consecutive bearish quarters last seen in 2000 ultimately resolved with higher prices. For the time being, above 1522, one can stay bullish for gold.

Base metals drift

Events in Europe continued to set the tone for base metals performance last week. “While an end to this period of macro tail risk influence is challenging to project, mounting net short positioning points to covering risks and price support”, commented an expert.

On Thursday, LME base metals traded lower bringing to close a weak quarter for commodities in which copper fell 4 per cent. Except tin and zinc all prices fell over the week. Lead was the weakest performer of the week, closing down over 3 per cent while tin prices closed up 1.3 per cent. Aluminium closed the week at $1,875 a tonne and copper at $7,510.

As prices are weighed down by events in Europe, the upside potential will be limited until risks recede. Rapid inventory build in copper has shaken the confidence of market participants. While demand is stable, Chinese buying of copper at $7,500 is seen supportive. In case of aluminium, new capacity is being added notwithstanding the fact that fundamentally the metal is an underperformer.

Technical picture suggests copper will face resistance at 7750 and 7710, while support is seen at 7565 and 7485. Further weakness for copper toward 7300 cannot be ruled and a break below there will signal a move toward range lows.

Crude may slip

Brent crude oil prices are in a 27-month long sideways drift, according to experts who expect the period of drift to continue for a while with supply and demand dynamics remaining benign at the global level, and with supply security concerns being pushed back in time.

In Q2, demand for crude oil is seen healthy on the back of ongoing growth in consumption (recovery in the US, extension of structural growth in non-OECD region). To meet this increased call on crude, supplies are expected to improve. In the event, there will be a well balanced market.

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