Gold under pressure; waiting for direction

On the back of weakening global cues, global commodity markets went through a week of worsening sentiment as reflected in widespread price declines virtually across the board. For market participants risk aversion was the theme with unabated eurozone debt crisis the main focus of attention.

In the crude market, the price differential between WTI and Brent narrowed significantly, while base metals performed poorly (with exceptions) because of gloomier macro picture. Even gold suffered due to the recent sell-off and could not stand up to pressures of liquidation, despite a favourable macro background. Agricultural commodities too faced declines last week because of lack of risk appetite among market participants. Interestingly, iron ore prices gained 7 per cent week-on-week.

Without doubt, concerns over Europe are very real. Will the European contagion spread to the world economy? Until the European situation becomes clear and concerns over China (will there be hard-landing?) abate, it is increasingly clear that commodity markets are unlikely to move into the sustained recovery mode. No doubt, in some cases such as crude and copper, the market fundamentals are supportive, but the sentiment is far from helpful.

A strengthening dollar too exerts its own price impact on commodities. The very fact that even the most popular safe haven asset – gold – has not remained unscathed from widespread risk-off attitude is proof that all is not well. We need sustained flow of positive macroeconomic data. However, the leading indicators are far from impressive.

In such a situation, the markets are likely to remain highly volatile and even minor developments may exert disproportionately larger impact but in a transient manner. Also, it would be advisable not to take trading positions far forward simply because of the intractable nature of economic and political developments.

Gold: During week ended November 18, all precious metals were down. While gold was down 3 per cent week-on-week, silver fell more sharply at 4.5 per cent. On Friday, in London gold PM Fix was at $1,719 an ounce down from the previous day’s $1,743/oz. Silver AM Fix for Friday was at $32.35/ox, down from previous day’s $ 33.30/oz.

Expert opinion is unanimous that serious concerns over growth prospects and spread of European contagion have scared investors and pushed them into a sell-off mode. Even physical demand has softened as traders now expect a further fall in prices. The market nearly ignored the positive statements in the latest World Gold Council report for third quarter 2011 covering the strength of investment demand and central bank buying.

While physical demand will continue to support the downside, the key to gain higher traction is investor interest. Whether they would return to the market and when is the million dollar question. As for silver, it will continue to remain vulnerable to price correction because of weak demand-supply fundamentals.

According to technical analysts, the near-term downside risk in gold is seen toward 1,680, and prospect of any further weakness appears hazy. Indeed, macro conditions favour a move higher. In silver, a move below 30 looks unlikely, while upside target is 35.70. Medium term outlook is bullish.

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Posted by VBN on Nov 21 2011. Filed under Gold. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry