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Precious metals continued their uptrend – gold and silver conquered levels recorded in January last year. While there have been some degrees of profit booking coming in, the month of June remains event-heavy with the Federal Reserve meet scheduled on the 14-15th and Britain’s referendum on remaining part of the EU scheduled on the 23rd. While expectations around a Fed hike have been diminishing, the uncertainty around the ‘Brexit’ event is expected to be fuel enough to keep investment interest in this asset category.
Gold prices breached the upper end of the range indicated in our previous month’s coverage, surpassing the USD 1300/oz level, a level touched briefly in January 2015. Amongst other discussed factors, which have worked in favor of the yellow metal, as with other precious metals, negative interest rates are having a direct bearing. Central banks in around 24 countries have bought interest rates in the negative territory and this trend seems to be up with more countries – with that leaving little on the table for investors to park funds with banks, gold is assuming the next logical bet. Economies adopting negative interest rates are reflecting a surge in gold demand. Japan, for one, is seeing a sharp pick up in gold demand – Tanaka Kikinzoku Kogyo K.K, one of Japan’s largest gold retailers, reported sales of gold bars surging 35% to 8,192 kilos in the first three months of 2016 compared to the same period in 2015.
A look at the chart tshows how demand from gold as an investment has helped the metal retain its shine in spite of a sharp YoY decline in demand from key markets, such as India and China and key usage as jewelry. India saw jewelry demand dip by 62 tonnes YoY, accounting for nearly half of the 115 tonne decline. The World Gold Council in its report, Gold Demand Trends (May 2016), though outlined a belief in Q1 demand, within the Indian market, having got ‘postponed rather than lost’ – with the re-opening of jewelry stores towards the later half of April and the festival of Akshaya Tritiya marked by gold purchases along with the onset of the wedding season.
On the investment side, global demand has shot up to a seven-year high of 617.6t; the second highest quarterly total on record, after 626 t recorded in Q1 2009, the depths of the recession. ETFs were the main driving factor with inflows surging to 363.7t following almost 3 years of continued outflows.
Silver continued the sharp rally that began from the beginning of April, surpassing the earlier indicated resistance area around USD 16.5/oz, breaching the USD 18/oz level. While prices have retraced since, largely on account of profit booking, it has surprised many, outperforming most asset classes year-to-date. Interest in the metal remains high; one indication of the same emerges from the inventory built up on the Shanghai Futures Exchange – stocks have grown to 1,885 metric tonnes as on 3rd May; this has more than tripled from 596 mt in December 2015.
The gold/silver price ratio currently stands around 74; the long-term average, based on data since 1970 is 57 – providing ample scope for higher prices. It has corrected recently from a resistance range (USD 17.70/oz – USD 18/oz) that led a reversal downwards in May last year. However, when seen in perspective that prices ran up 17% since the beginning of April, a cool-off is warranted and in light of some of the events listed earlier may well be consolidating for its next leg of rally.
Prices eventually breached the USD 1000/oz level and sustained, trending higher towards USD 1100/oz. The run up in the metal for the year has reflected in miners recording recoveries – South African miner Lonmin PLC, the world’s third largest producer of platinum, saw pre-tax losses of USD 21m in the six months to March, this compares to a loss of USD 118m the same time a year ago. Revenue climbed 1.3% to USD 515m. Sentiment would be buoyed by the latest projections by the World Platinum Investment Council which expects 2016 to have a deficit of 455 koz; this, against the 135 koz deficit anticipated in the previous forecast, owing to a combination of lower supply and higher demand projections for this year.