Investors’ eternal favourite gold has failed to retain its glitter after a solid start this year (trading over $1,300 an ounce) as weeks progressed. Risk aversion and flight to safety in the light of a rather hazy outlook for the global financial system triggered by events in Greece, have caused a fall in prices to below the psychological level of $1,250/oz.

In the week ending February 13, the yellow metal dropped over one per cent., It traded at $1,213.45 in London on Tuesday, witnessing a sharp fall as Greece talks collapsed and Chinese buying for the New Year was slack.

The strident rise in the dollar and positive macro data emanating from the US ensured that any price rise was capped. No wonder, rallies were short-lived.

But the important point here is that January marked the strongest month since September 2012 in terms of physically backed ETP flows. Indeed, ETPs found several successive sessions of inflows during the month and reached over 1,770 tonnes. At the same time, speculative positioning too reached a 2-year high.

Despite such supportive factors, gold failed to shine simply because of the metal’s sensitivity to a potential rate hike by the US Fed sometime this year, possibly by mid-2015. Gold’s fundamental driver – the physical demand – has weakened.

The Chinese New Year demand has run its course, while Indian demand is lacklustre.

Inventory levels are high. The anticipation of some reduction in customs duty on gold import in the upcoming Budget announcement has kept buyers on the sidelines.

From a currency perspective, the dollar is expected to continue to remain strong although further gains will be slow to materialise.

Investor flows have been bullish in January; but with prices in correction course, less-committed investors will exit. Going forward, unless there is a change in sentiment, the yellow metal is likely to face downside price risks.

The next target is, of course, $1,200/oz. Despite the weak of gold, others in the precious metals complex performed rather well last week. Silver, platinum and palladium all gained markedly – by 1.8 per cent, 1.5 per cent and 1.4 per cent respectively to end the week at $17.22, $1,239 and $786.

Platinum prices are likely to continue to be impacted by weak European demand.

At what point in time demand in the financially troubled region will begin to show improvement is debatable.

The announcement of Europe’s own quantitative easing is seen as a positive step, but the market would want to see the impact of liquidity easing reflected in positive macro data. It is going to take time.

In case of palladium, the supply-demand fundamentals clearly favour higher market prices; but as experts point out, this metal is vulnerable to wider market sell-off.

Related Topics