Tapering pushes gold below $1,200/oz; pressure set to mount

It happened at last! On Wednesday, the US Federal Reserve announced the start of tapering or winding down of the quantitative easing.

From January 2014, monthly asset purchases will be reduced by $10 billion to $75 billion.

Based on the Fed chairman’s speech, it is clear that QE will be gradually scaled down over the coming months.

Financial markets reacted calmly to the announcement, while in the commodity market, gold and silver, most sensitive to QE, suffered, with the yellow metal tumbling below $1,200 an ounce on Thursday, a decline of 2.8 per cent from the previous day in London.

Silver fared no better. However, for other commodities such as base metals and crude, that are largely growth-driven, the news of tapering was positive as it sent out signals that the US economy was turning the corner.

Limited effect of tapering on commodities in general, except in gold and silver that suffered due to falling risk appetite, suggests that QE has little direct impact on commodities.

Over the week, in London, all precious metals were down with gold prices declining by as much as three per cent and silver by 1.1 per cent.

Platinum and palladium suffered reverses of 2.9 and 3.2 per cent respectively.

Among base metals, LME zinc was the outperformer with a price rise of 3.1 per cent followed by lead 2.9 per cent and nickel 2.3 per cent.

Aluminium and copper edged lower. Oil WTI was up 2.8 per cent.

Overall, there seems to be evidence that the global business climate is improving with stronger data recorded by the US, Europe and Japan in the past week.

Additionally, growth expectations for the BRICs in 2014 have stabilised, fears of a China hard landing have dissipated and global manufacturing has rebounded, according to experts.

All these factors paint a positive picture of commodity demand next year.

With tapering becoming a reality, the precious metals market led by gold came under further pressure last week with rates falling below the psychological level of $1,200.

In London, on Thursday, gold lost as much as 2.8 per cent to fix at $1,196 from the previous day’s $1,231.

On Friday, it edged lower to $1,195.

Silver suffered heavily with three per cent price decline on Thursday with AM Fix of $19.34/oz ($19.94) and edged lower to $19.33 on Friday.

Platinum too was pulled down by 2.4 per cent to $1,321 on Thursday ($1,354) and on Friday, it slightly recovered to $1,328 while palladium stayed unchanged last two trading days at $700.

So, where’s gold headed from here?

Downside risks have increased after the start of tapering. With prices falling below the key threshold of $1,200, ETP outflows are expected to accelerate.

Already such outflows have reached a staggering 824 tonnes this year, some 30 per cent from their peak. Another 100 tonnes may flow out.

While investor flows are bearish, CFTC data suggest that gross longs continue to hover around 2008 lows and gross shorts remain elevated. From a fundamental perspective, the drivers are enervated.

In India, prices have remained below Rs 30,000 for 10 grams.

Demand has been lacklustre despite the seasonal factors.

There is nothing to suggest easing of gold import restrictions in India anytime soon.

The one saviour could be China where ahead of the Lunar New Year on January 31, demand is expected to pick up.

Despite huge influx of loose money, inflation in the US is yet to catch up.

Additionally, a firmer dollar will pressure gold prices and a stronger equity market will encourage investors to exit gold. So, the risks to gold prices are truly skewed to the downside. Will Indian consumers be able to enjoy the full benefit of a gold price fall in international market? Unlikely in full measure, as the rupee risks weakening.

The tariff value for imported gold will of course be corrected down suitably. Based on media reports, punters continue to scream about rising incidents of unauthorized imports of the precious metal with the hope of a possible reduction in the rate of customs duty (10 per cent); but large-scale commercial smuggling is most unlikely given that sophisticated equipments are available and used for surveillance.

From a technical perspective, momentum for gold is bearish.

Resistance is seen at $1,250 and $1,230 while support is seen at $1,180 and $1,155.

Chartists see bearish trend in the yellow metal and below $1,180 would point to the $1,155 area.

Zinc was the best performer on LME last week with a 3.1 per cent rise to $2,038/t on the back of concerns over supply both near and medium term.

LME zinc stocks are at their lowest since March 2012.

Meanwhile, exchange copper stocks fell 4.2 per cent week on week with a 12,000 tonne draw from Shanghai, observed an expert.

However, importantly, the looming Indonesian export ban has been the focus of market attention last week and base metals are gaining support. “It is arguably the most broad-based supply risk the complex has ever faced, and definitely so in 2014”, remarked an analyst.

But diverging statements by Indonesian government officials tend to send out signals that the discussion still lacks precision.

On LME, Friday cash copper closed at $7,249/t and aluminium $1,740/t.

Technically, copper momentum is overbought. Resistance is seen at $7,420 and $7,300 while support may be available at $7,130 and $7,050.

In aluminium, chartists prefer to fade upticks towards $1,825 and against the $1,850 area, while expecting a move lower toward $1,735 and then $1,600.

Tapering has had little impact on crude prices.

Brent crude continues to find support from supply outages with Libya still the main focus.

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