Precious metals complex to remain highly volatile on global cues

Motilal Oswal Financial Services

After weeks of rangebound trading, gold surged above $1,240 an ounce and closed the week at highest level in the last five months.

In the last few months, gold consolidated in a range of $1,180-1,250 and this month, weakness in the dollar following expectation that the Federal Reserve may go slow on raising rates supported the bullions on lower levels.

It seems most market participants remained on the sideline ahead of the important economic events that were lined up last week starting with G-20 meeting, wherein the US agreed to a 90-day ceasefire in its trade war with China.

Navneet Damani

AVP- Research|Motilal Oswal Commodity Pvt Ltd.

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But it seems that the US President is no mood to keep things peaceful. US markets were hit hard as the trade war news flow again started to take control of the market. US president Trump has threatened to place “major tariffs” on Chinese goods imported into the United States if his administration is unable to reach an effective trade deal with Beijing.

Crude prices rallied before the end of the week, and gained 5 percent as market reacted to the new production cut agreement. OPEC on December 7 announced it will reduce overall production among its members by 1.2 million bpd during the first six months of 2019 in an effort to stave off a global glut in supplies and prop up prices.

The recent decline in crude prices also came as jitters pegged to international trade relations between China and the US escalated, and raised concerns about demand for oil. Market tension intensified after the arrest of Huawei Technologies’s chief financial officer, Meng Wanzhou, in Canada at the request of the US.

Gold

From the US, a number of economic data were released but reaction on the dollar was muted. Dollar against its major crosses closed the week at 96.51 and major reaction was seen after the release of non-farm payrolls number. Data showed the US economy added 155,000 jobs in November compared to 200,000 job addition in the previous month.

Unemployment rate was at 3.7 percent. Wage growth rose in line with forecasts, keeping the Fed on track to hike interest rates this month. But the report indicated that the labour market may not be as strong as hoped, easing pressure on the Fed to keep hiking rates in 2019.

Earlier in the week, private payrolls number disappointed as it showed the private sector added 179,000 jobs in November compared to job addition of 225,000 jobs in the previous month.

In the G20 meeting, US and Chinese President agreed to a ceasefire in their bitter trade war and both the countries agreed they will try to have this “transaction” completed within the next 90 days, but if this does not happen then the 10 percent tariffs will be raised to 25 percent.

The encounter came shortly after the Group of 20 industrialised nations backed an overhaul of the WTO, which regulates international trade disputes, marking a victory for Trump, a sharp critic of the organization.

After the G20 summit, market participants will now be keeping an eye on the FOMC policy statement that is scheduled next week, wherein a rate hike is factored in as of now.

Gold failed to break an important resistance of $1,240 in the previous week and witnessed selling pressure at higher levels, but losses for the commodity were limited after investment demand rose last week.

Investment demand for gold remained robust and for the week ended November 25. Total gold holdings added another 3.07 tonnes and total gold holding stood at 1679.56 tonnes.

On the other hand, silver ETFs for the week ended Nov 25 added 17.52 tonnes and holding stood at 10,109.16 tonnes. CFTC data showed gold speculators unwinded their long positions and turned on the short side after remaining long for four successive weeks.

Base metals

LME copper prices ended in the green after some relief on the trade tariff front. The metal has been stuck in a tight range on signs of weakness in demand and macro related growth worries.

China is slowing due to the ongoing trade conflict with US. This has led to a reduction in China’s growth outlook and furthermore, the country’s GDP is expected to slow towards 6.2 percent in 2019 from 6.5 percent this year.

Copper has very low exchange inventories. The premium for cash copper over the three month price was at $9.50 a tonne, down from a peak of $44 in late November, indicating increased nearby supply. LME copper stocks are at their lowest in a decade.

The major supporting factor is the lower inventory levels, which may help stabilise the prices. The downside pressure on MCX Copper prices will increase if the Fed raises its interest rate for the fourth time this year in its upcoming policy meeting.

Zinc prices along with Lead gained around 3 percent each last week. It has the best fundamentals amongst the complex at the moment. LME zinc stocks have halved since mid-August and are near a 10-year low. The premium for cash zinc over the three- month price at $114 a tonne, was near its highest ever levels, indicating an extreme lack of nearby supply.

Traders are keeping a close eye on positions holding large amounts of LME zinc warrants and cash contracts, which are causing jitters about nearby availability.

OPEC-led group agreed to rollback output by 1.2 million bpd during first six months of 2019 against the expectations for cuts to fall between 1 million and 1.4 million bpd.

OPEC will curb output by 0.8 million bpd from October levels, while non-OPEC allies contribute an additional 0.4 million bpd of cuts. A further breakdown shows Saudi Arabia will reduce its production down to about 10.7 million bpd in December and to 10.2 million bpd in January. Russia is going to cut about 228,000 to 230,000 bpd.

EIA (Energy Information Administration) inventory data showed that inventories fell by 7.3 million barrels for the week against the expectations for a decline of 2.39 million barrels. This was first reported draw in 11 weeks.

EIA reported a rise in gasoline stockpiles by 1.7 million barrels against the expectations for an increase of 3,57,000 barrels while distillate stockpiles climbed 3.8 million barrels against an expectation of 1.25 million barrel build in inventories. Offering a hint on US production activity, Baker Hughes reported that the number of active domestic rigs drilling for oil fell by 10 to 877.

For this month, the major factor that added pressure to bearish momentum was the data from the US that showed it became a net oil exporter last week for the first time in 75 years.

US crude oil exports surged to record high of 3.203 million bpd last week, as oil production also soared to record highs. Data from EIA showed that US crude oil production was at a record 11.7 million bpd throughout November that was more than what each of Russia and Saudi Arabia pumped in November, although the Saudis also reached record highs in their production last month.

Outlook

In the coming week, the precious metals complex could be highly volatile as there are host of events which could keep the forex market volatile. The UK is to publish its monthly GDP report, along with data on manufacturing and industrial production.

This will be followed by British parliament voting on PM Theresa May’s Brexit plan that she negotiated with Brussels.

Later, the European Central Bank is to hold its final policy meeting of 2018, which will be followed by a press conference with President Mario Draghi.

We expect Comex gold prices to be trading with a positive bias on breach of key technical levels, and expect a rally towards $1,265 and $1,290, while support are placed at $1,225 and $1,215.

Metals at the moment are all macro driven. The world is in a very vulnerable situation, but while global growth looks like it's peaked it's not slowing measurably, so we are seeing range bound trading.

MCX Copper has been sustaining well above the strong support of Rs 420 and bias remains positive as long as price holds above the same. However, upside too will be capped around Rs 447–450 which will act as key resistance zone. Short-term support is at Rs 430. Dip buying is advised. Immediate support on LME is placed at $5,950 whereas resistance is at $6,300.

The current trend for crude remains positive and the markets can get an additional boost from a weaker US dollar, which could drive up foreign demand for US crude.

However, gains could be capped by concerns over a slowing global economy, worries over a potential escalation in the US-China trade dispute and stock market weakness and volatility. Market players will also focus on monthly reports from OPEC and the IEA this week to assess global oil supply and demand levels.

The author is AVP-Commodities Research at MOFSL.