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Gold, silver prices to trade higher; base metals lower in coming fortnight

Naveen Mathur     January 28, 2015

Naveen Mathur
Non-Agri Commodities  

The global equity markets went into turmoil initially, owing to uncertainty regarding the European Central Bank's (ECB's) decision on monetary stimulus and Greece's elections, coupled with the Swiss National Bank's (SNB's) scrapping the exchange rate with the Euro. Further, concerns over faltering economic growth in China to the lowest levels in 24 years, along with the International Monetary Fund (IMF) cutting the global growth outlook for 2015 and 2016 by 0.3 percentage points, hurt the markets sentiments. However, a sharp rebound was seen after the ECB unveiled a massive monetary stimulus of 60 billion euros per month, starting March 2015 till September 2016, to boost lending and economic growth.

The rupee appreciated by around 1.5 per cent as the RBI took the much anticipated measure and slashed repo rate by 25 basis points to 7.75 per cent, owing to easing inflation pressures. Capital inflows continued in booming local equities amid sustained dollar selling by exporters and some banks supported upside. However, strength in the DX, along with mixed market sentiments, restricted gains.

Spot gold prices rose by 5.85 per cent, while MCX gold prices rose by 3.97 per cent. Switzerland's central bank unexpectedly abandoned its three-year cap on the franc, sending global shares and bond yields into turmoil. Stock markets around the world fell sharply after the World Bank cut its growth forecasts for 2015 and 2016, fuelling fears that the benefits of cheaper oil may be offset by anaemic growth and the threat of deflation. The dollar index rose by 3.15 per cent, benefiting from more upbeat US economic prospects that should keep the Federal Reserve on track to raise interest rates this year. Prospects of ECB stimulus measures sent gold prices higher. As per market expectations, the ECB launched a multi-billion euro bond-buying programme aimed at reviving a sagging Euro Zone economy. President Mario Draghi said the ECB would print money to buy up 60 billion euros ($69 billion) worth of sovereign bonds a month in the Euro Zone, where inflation, at minus 0.2 per cent, is far below the central bank's target of just under two per cent.

International spot silver prices rose by 10.67 per cent and MCX silver prices rose by 8.5 per cent. The positive momentum is in tandem with rise in gold prices and investors focus from risk assets to the precious metals. Increasing speculative interest also acted as a positive factor.

LME Copper prices plunged the most among non-agri commodities by 9.6 per cent as China's GDP stood at the lowest level since 1990. Also, the IMF has lowered its 2015 growth forecasts for commodity exporters, including South Africa, saying the projected growth rebound for commodity-exporting developing countries will be weaker than had been forecast. Also, weak manufacturing data from China and the US stoked demand concerns. MCX Copper prices slumped by 10.7 per cent, owing to rupee appreciation.

WTI and Brent oil prices lost its value by around 5.73 and 2.63 per cent, while MCX oil prices declined by around five per cent. The market sentiment remains bearish due to a supply glut. US crude has been cheaper than Brent because soaring North American shale oil production has pulled down prices, while the rest of the world market remained more tightly supplied. But with oil producer club OPEC deciding late last year to maintain its output despite slowing Asian and European economies in order to defend its market share, including against surging U.S competition, a glut has also appeared outside the US. Top crude exporter Saudi Arabia revealed it made deep cuts to its monthly oil prices for European buyers, the sixth time since June it has slashed prices, corresponding with the rout in crude futures markets over the period.

Outlook

Gold and silver prices are expected to trade higher in the coming fortnight as the ECB action on monetary easing to revive the sagging Euro Zone is a signal that the economy is in doldrums, which can turn the flight from risk assets to safe haven supporting gold prices. On the other hand, weak investment demand on account of continuous outflows from the SPDR gold trust is not a good sign for gold prices.

The negative momentum in crude is expected to continue as ample supplies dominate energy markets. ECB monetary stimulus is a step in the right direction, but it remains to be seen how industrial activity progresses in the Euro area in the coming months.

Base metals are likely to trade lower as estimate of weak US GDP data will exert downside pressure on prices. Also, consistent sluggish data from China and Euro Zone will continue to drag prices lower.


Agri Commodities

Chana: In the pulses counter, we saw a negative price trend and chana prices dipped about 5.5 per cent. It opened at 3,485 levels and fell to 3,297 levels due to sluggish demand and on expectation of new crop arrivals in less than a month's time.

According to the latest update by the Directorate of Economics and Statistics, Ministry of Agriculture, the area coverage under total pulses is at 133.55 lakh hectares, while last year's sowing area coverage was 150 lakh hectares.

For chana, the coverage is at 81.97 lakh hectares, lower by 17 per cent, as compared to 98.68 lakh hectares last year. During, April to September 2014, India imported around Rs 1.29 lakh metric tonne chickpeas from Australia and Tanzania, much less than 2.76 lakh million tonne the previous year.

The government's decision to postpone the duty hike till March has kept the speculators away, prompting them to offload their positions. We expect that on the back of weak spot market demand against new crop arrivals and adequate stocks position might keep pressure on chana prices at futures trade.

Edible oils: We saw negative trend in price movement in refine soy oil and CPO futures market. It was mainly due to the low demand and also taking some signal from the international edible oil market. Meanwhile, the vegetable oil imports in India increased seven per cent to 11.39 lakh tonne in December against 10.67 lakh tonne in the same period a year ago on cheap imports from Indonesia and Malaysia.

CPO prices in international markets have declined on concerns of dismal global economic outlook might weaken prices. The weather and currency factor is positive for the CPO oil prices, but the global slowdown might affect the prices.

Higher production of oilseeds and edible oils in the world markets might keep domestic markets under pressure, despite bullish domestic fundamentals.

Edible oil is expected to trade mixed to lower in the coming fortnight due to less demand and cheap imports.

Sugar: Sugar prices have witnessed a range bound movement and closed 1.90 per cent down last fortnight. It is due to subdued demand as well as ample supply in the market as mills are producing more sugar in the last two to three weeks. It traded in very narrow range of Rs 2,737 to Rs 2,745 per quintal.

There is expectation of export subsidy on raw sugar. The government is considering extending subsidy on raw sugar exports for the ongoing marketing year 2014/15 by giving a higher incentive of Rs 4,000 per tonnes to cash-starved mills.

Meanwhile, the domestic sugar production has reached 10.3 million tonne till Jan 15, 2015, as against 6.98 million tonne in the year-ago, a rise of 19 per cent.

We have seen positive price movement in the international market as Brazil announced to introduce more taxes on gasoline from February 1.

We expect sugar prices to trade on mixed note due to export subsidy and pressure from the record production and ample supplies of sugar carry over stock in physical market.

Spices: Last fortnight, the spice segment traded on a negative note. Jeera witnessed a drop of over seven per cent in the last three trading sessions as market participants offloaded the positions in the futures market due to profit booking at prevailing higher levels. But the prices are five per cent up on fortnightly basis. In this season, there is a 42 per cent drop in acreage in Gujarat and new crop is expected to hit late in the market due to late sowing,

Turmeric traded on a negative note due to technical reasons as the market participants offloaded their positions on higher levels for profit bookings. There is subdued demand from retailers and traders at high prices. The new crop has now hit the markets in Maharashtra, Andhra Pradesh and Karnataka.

Dhaniya traded on a negative note on sluggish trading activity and reports of record sowing in Gujarat. The market participants are more interested in reducing positions amid ample stocks in the spot market against sluggish demand.

We expect the spices segment to trade on a mixed to positive note on account of export inquiries in jeera and good demand in turmeric and dhaniya.


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