Gold shines as economic uncertainty prevails

In the last week, Spot Gold prices gained around 1.0% as rising uncertainty over the global economic scenario led to higher demand for the yellow metal as a safe-haven asset. Economic data from the major economies in the recent past has not been satisfactory and has led to concerns over slow recovery in growth in countries like the US, UK, Euro Zone and China. Investor sentiment continues to remain mixed due to no clear direction over economic progress. In the global financial markets, economic recovery has currently taken centre stage and data from major economies is currently driving risk sentiments. Fears of a double-dip recession have gripped the financial markets and this is the main factor which is boosting demand for gold.

Spot Gold prices touched a high of $1,237/oz in the last week and prices on the MCX touched a high of Rs18,790, gaining 0.9% on a week-on-week basis. Sharp gains in gold prices on the MCX platform were capped on the back of Rupee appreciation. But festive season buying in India is expected to boost demand and lead to higher prices. The Rupee is expected to trade on a volatile note as market sentiments remain mixed. If risk aversion holds grip in this week then the currency is expected to depreciate, thereby helping gold prices on the MCX to rise.

Holdings of the SPDR Gold Trust rose to 1,295.51 metric tons as of 18th August from 1,294.60 metric tons the previous day. SPDR Gold Holdings had touched a record high of 1,320.43 metric tons on 29th June. Uncertain economic scenario is expected to lead to increased demand for gold in the short-term.

Factors that will boost demand for gold

·         Gold imports in India gained 18.9% to 155.6 tonnes in the first six months of this year. Demand for gold in the Indian markets is expected to rise as a good monsoon is expected to raise rural incomes. Rural consumers are expected to flock to gold for investment as well as jewelry requirements.

·         China is allowing more banks to import and export gold for consumption purposes. The country has also opened up gold trading to foreign companies. China is the world's largest gold producer but the country had to import 100 tonnes of gold on the back of rise in demand. China's share of global gold demand has risen to 11% in 2009 from just 5% in 2002.

Fundamental Outlook

Global financial markets are currently concerned over a double-dip recession. Recovery in the US, the world's largest economy is under doubt as unemployment rate in the country continues to hover around 10%. This indicates that the US job market is currently weak. Also, credit is locked up tight and the housing market is awash in unsold and uninhabited homes. The US Federal Reserve left its benchmark interest rate at 0-0.25% and said that it would keep rates low for an exceptionally long period. The central banks said that it would buy government debt by reinvesting proceeds from its mortgage bond portfolio into long-term Treasury securities.

Growing uncertainty over the impact of the Euro area sovereign debt crisis coupled with slow progress on the US economic front is dominating market sentiments. Debate on whether economic recovery has picked up pace or no also continues. Chinese economic growth is also witnessing a slowdown as the GDP growth in the second-quarter in China slowed down to 10.3% against growth of 11.9% in the first-quarter. The overall global economic scenario is bleak and demand for precious metals as a safe-haven is expected to rise.

We have a positive view on Gold from a short-term perspective as growing economic uncertainty will raise demand for gold as a safe-haven. But sharp gains in Gold prices could be capped as the DX is expected to strengthen.

Commodities Update – August 7, 2010

International Perspective

The commodities segment made substantial gains in the last week, with natural gas prices being the exception. Base metal prices continued to lead the rally in the commodities segment, whereas gold prices also rebounded after falling drastically in the earlier weeks.

Zinc prices were the top performers in the base metals pack, gaining more than 4.5% on the MCX in the last week. The metal prices were supported by improving inventory scenario on the LME coupled with decline in zinc output in China. Zinc experienced the sharpest production decrease among all the base metals in June, posting a drop of 26,000 tonnes from the previous month. LME zinc inventories declined in all the sessions of the last week.

Lead prices continued to post strong gains for a third consecutive week, gaining more than 4% in the last week. Lead prices touched a 14-week high of Rs 102.80/kg, mainly helped by the weakness in the US dollar index (DX). However, long-term fundamentals for lead continue to remain mixed. China's June lead output rose by 14.29 percent from the previous month. Estimates from International Lead and Zinc Study Group (ILZSG) suggest that the lead mine production will total 4.2 million tons in 2010; 5% greater than the previous year.

Natural gas prices lost more than 8% in the last week on reports that natural gas drilling rigs rose by 11 rigs to 983 rigs in the last week. Despite expectations of hot weather increasing demand for the commodity, the ample supplies in the US storage seem sufficient to meet the needs. Natural gas storage increased by 29 bcf as against the previous of 28 bcf in the w/e July 30th.

Agri Perspective: Soybean and refined soy oil gains substantially in agricultural commodities in the last week. Soybean prices surged sharply on account of continuous rise in overseas market due to dry and hot weather in USA and US Department of Agriculture's weekly export sales figures of soybean was well above trade expectation. As per Solvent Extractors Association of India (SEAI), India's oil meal exports in July 2010 increased 39% to 241,182 metric tonnes from 173,329 tons a year earlier also provided support to the bulls.

Refined soy oil surged in tandem with overseas market. Crude Palm Oil (CPO) futures at Bursa Malaysia Derivative Exchange surged due to increased demand of edible oil from Muslim countries ahead of Ramadan (fasting month). Also, cheaper prices of CPO compared to other edible oils, added bullish market sentiments as India is a major importer of Palm oil. India is likely to import 5.5 to 6 lakh tone of Palm Oil for August. India is the world's second-largest vegetable oils consumer after China, may purchase more palm oil in the next two months than soy oil, as palm oil discount has widened.

Maximum fall was witnessed in NCDEX Turmeric, Jeera, Pepper, Chana and Guar Seed.

Turmeric Prices slipped more than 4 % due to higher production estimates for 2010-11 and poor demand from overseas market.

Jeera prices witnessed downtrend due to lower quotes offered by Syria in international markets. Syria is one of the major producing nations of Jeera.

Black Pepper prices closed in red in last week due to harvesting progress and fresh arrivals in Indonesia. Lower quotes by Indonesia in international market are also pressurizing prices in the domestic market. Indonesian origin was being offered at $3,950-$4,000/tonne whereas Indian origin was offered at $4,400-$4,450/tone.

Weekly Performance of Currencies

The Indian Rupee (INR) delivered good performance in the last week as the currency appreciated more than 1% to close at 46.42 against its close of 46.94 in the previous week. The currency rose to a one-month high in the last week as initial public offerings on the domestic equity front led to a rise in capital inflows. FII inflows in the month of July 2010 stood at Rs16,617cr against Rs10,508cr in June 2010. Year-to-date FII inflows in India totaled Rs47,694cr. Weakness in the US Dollar Index (DX) also provided strength to the INR. The RBI raised the repo rate by 25 basis points to 5.75%, whereas the reverse repo rates were increased more than market expectations. Reverse repo rate was increased to 4.5% from the previous of 4%. However, the CRR rate was left unchanged at 6%. The central bank also raised its March-end inflation forecast to 6% from the previous estimate of 5.5%.

Economic data from the US, the world's largest economy has come on the negative side in the last few days. This has led to lower expectations of a rise in interest rates in the US any time in the near future. On the back of this, the DX depreciated in the last week to close at 81.54. The DX weakened despite mixed sentiments in the financial markets, which is neither too positive nor very negative. Performance of the Euro was good as the currency gained 1% in the last week as slow and steady recovery in the Euro Zone and positive economic data provided support to the currency.

The German consumer climate index increased to 3.9 in July as against expectations and the previous figures of 3.6. Moreover, the M3 money supply in the Euro zone grew by 0.2% in June as against the expectations of 0.1% decline. In the previous month of May, the money supply had declined by 0.1%.
Loans to the private sector rose by 0.3% in June as per data reported by the European Central bank (ECB). Positive economic data has led to re-emergence of demand for the Euro despite the impact of the ongoing sovereign debt crisis.

Economic Update
• Moody's Investors Service upgraded India's currency rating to Ba1, just a notch below the investment grade, taking into consideration the recent reforms adopted by the government to reign in the fiscal deficits.
• New Home sales in the US increased to 330,000 in June as against 267,000 in May. Markets had expected the new home sales to increase to 317,000.
• The advance GDP figures reported on Friday indicated that the US economy grew at a slower pace in the second quarter on the back of slowdown in consumer spending. The world's largest economy grew at 2.4% in the second quarter as against expectations of 2.5%. In the first quarter, the US economy grew by 3.7%.
• The revised consumer sentiment index improved slightly in July. The index reported figures of 67.8 in the current month from 66.5 in the previous month. Markets had expected the consumer sentiment to rise to 67.3. Moreover, the Chicago PMI also increased to 62.3 in July as against 59.1 in the previous month.
• The IMF in its stress tests said that the US financial system remains fragile and might need around $76 billion in additional capital. Despite the financial system approaching towards stability, poor economic scenario has enough potential to bring the financial system into trouble.
Outlook
In this week, we expect the Indian Rupee to trade with an appreciation bias as weakness in the DX coupled with continuing inflows in the domestic markets will help support gains in the currency. Poor economic data from the US will continue to cap rise in the DX and we expect the currency to weaken in this week. We expect the Indian Rupee to trade in the range of 45.85 to 47.15 in this week.