Physical demand in gold showing signs of tapering off

The biggest concern engaging the global market participants today is, not if but when will the US Federal Reserve begin to rollback its ongoing asset purchase programme and ‘easy money’ policy.

With growth signals picking up momentum and economy appearing to move closer to the policy objective, markets are beginning to take cognisance and price-in the exit of the highly accommodative policy stance of the US Fed. Opinion about the timing of the exit is divided.

Some analysts expect the Fed to taper the asset purchase not this year, but by early next year, given the modest growth outlook and subdued inflation.

After the downward correction in the second quarter across many commodities, especially metals, a mild recovery in global demand may be helped by seasonal factors in the next few months.

With signs of activity picking up in China, domestic prices of many metals are beginning to rule above international prices, paving way for imports.

Importantly, with supply growth, sluggish demand and other assets performing better, positioning in commodities has turned light which creates scope for a rebound. At the same time, a steadily firming dollar caps the upside price risk to many commodities. Last week witnessed mixed price performance across the commodities space, especially in the metals complex.

Gold was under pressure due to continued strength in the dollar and equity market. ETP outflows have continued, while physical demand has shown signs of tapering off.

Yet, week-on-week, gold was up 1.6 per cent while other precious metals were down between 0.6 and 1.0 per cent. Some central banks continue to buy gold providing a price crutch.

Price performance in base metals was mixed over the week.

Lead outperformed with a gain of 3.1 per cent to end the week on LME at $2,068 a tonne, while others were marginally up or down, with aluminum down 0.8 per cent. Crude WTI was down.

Gold

The yellow metal has been under pressure since the mid-April collapse, struggling to breach the $1,400 an ounce level.

Last week, it was buffeted by Fed chairman’s comments. There is a sense of relief that the asset purchase program will not be scaled back anytime soon.

Physical demand at lower prices has been supportive in recent weeks, but with the end of the traditional marriage season and beginning of crop planting season, jewellery demand is clearly tapering off.

Also, gold will remain under pressure so long as physically-backed ETPs face outflows. According to analysts, at least 100 tonnes of physical ETP holdings are still cash negative.

For gold, overall, the macro environment and physical markets are supportive, but investment demand is negative. On the other hand, platinum could prove to be a top performer over the next few months, especially if there is any major lost output in South Africa, an expert explained.

In London on Friday, gold PM Fix was $1,390/oz, up from the previous day’s $1,381. The weekly gain of 1.6 per cent followed Fed indication that asset purchase may not be scaled back anytime soon. Silver AM Fix on Friday was $22.38 down from previous day’s $22.47. Continuing to trade well above gold, platinum was at $1,455 and palladium $729.

The next target $1,350 when achieved will lead further down to $1,300. Whether Indian consumers will reap the full benefit of overseas price fall will depend on a large extent on the rupee movement vis-à-vis the dollar. If consensus view that the rupee will weaken proves right, then the fall in rupee price in the domestic market will be more restrained. Silver prices too are expected to be under pressure with ETP outflows.

Metals

On Friday, cash LME aluminium closed at $1,806/t, copper at $7,270/t and lead at $2,068/t.

Many experts believe base metals are poised to lead the commodities recovery.

On current reckoning, weaker-than-expected Chinese manufacturing data do not bode well for the future metals demand. The impact of this sentiment could keep prices in range.

Positioning is still heavily short in base metals.

At the same time, import economics for copper, aluminium and zinc are said to be getting better in China. Copper has been supported by supply disruption, while supply response in Indonesia to lower prices is helping tin.

Crude

The market has been under pressure. Fundamentals in the physical crude market are offering only a limited support against further downside. Brent runs the risk of drifting slightly lower in the short-run.

The OPEC basket price continues to drift near the $100 a barrel mark.

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