Gold May Soon Be Outperformed By Silver And Base Metals

The 20-day average for Comex Gold was at $1,736.80 and for silver, its 20-day average stood at 33.435, alerted in previous posts.

A big central bank infusion of liquidity into China’s financial system also helped to give gold futures and commodity markets a boost. Many of the global economic concerns are already factored into prices, such as the sharp slowdown in the European economy and continuing slowdown in China. Hence, the conservative rise in gold and silver prices seen till now, unlike the sharp boost seen after the earlier QE1 or QE2.

The People’s Bank of China obliged traders and offered another massive wave of stimulus, which can be seen as having a positive impact on commodity prices. News reports say the People’s Bank of China injected $58 billion into the country’s financial system this week. The economic chaos in Europe, which has potential to lead to serious large scale violence over escalating austerity measures, may put a cap and limit all strong upsides.

Labor unrest may impact Gold Prices only slightly:
Labor strife in South Africa is growing. Labor unrest that began in the South African platinum-mining sector last month continues to spill over into the gold sector. Numerous strikes meanwhile have brought around 39% of South Africa’s entire gold-mining production to a standstill. Workers clearly feel encouraged by the hefty pay rises achieved by their "colleagues" in the platinum industry.

The strikes are affecting all of the mines owned by AngloGold Ashanti, the world’s third-largest gold producer. Whereas the company has not yet put a number to the resulting production outages, Gold Fields, the fourth-largest gold producer, is talking of "losses" in the region of 32,000 ounces so far. Media reports have signaled nearly 39% of all gold production in South Africa has ceased due to the strikes, according to Thomson Reuters GFMS.. Any kind of supply disruption is always going to be supportive for Gold Prices. It’s important, but marginally so. The demand and supply have to be equally tight in opposite directions for a major price move.

The demand for physical Gold remains relatively light in comparison to earlier years. With record high gold prices in India and a crunching slowdown in China, the world’s biggest two buyers, demand for gold bullion or jewelry remains thin. Now with the INR-Indian rupee rising handsomely against the US dollar and a huge monetary infusion creating more liquidity in China may have a positive impact on physical gold demand in both these markets, but that remains to be seen.

Moreover, South Africa is recognized more for its vast platinum reserves and production, but the country contributes enough gold production for its price to be somewhat affected. All the above reasons could only supply a bottom to gold prices in the eventuality of a decline in gold prices but are not strong enough to boost gold prices higher. Technically gold prices yet have the short-term upside advantage and potential towards the strong $1855 resistance, also with the October gold futures coming to a close next week.

The real and major push for gold prices would come only when China starts converting its large Forex reserves of over 3 trillion to gold, to safeguard against the US dollar's meltdown. Only then would gold break above the $1855 resistance to rise to fresh lifetime highs above $2000.

Gold may remain Weak in Indian Markets:
MCX gold futures for December delivery had shot up to Rs.32,783 per 10 grams when Comex gold December futures hit $1790 recently after the Fed announced the much awaited QE3. Since then, Comex Gold has declined to $1740, a decline of around $50, whereas MCX gold prices have slumped to Rs.31,431, a decline of Rs.1,352 (over $130) on the back of a stronger INR – Indian rupee.

A trend alerted of well in advance, this may continue with the US dollar weakening further against a basket of major traded currencies globally. Gold prices in India may have limited potential further on. MCX silver and base Metals would prove to be a much better bet.

Base Metals have huge upside potential for the Short-Term:
Base Metals are expected to fare better in the coming quarter but the pace of rises is likely to be modest. Multiple and simultaneous Economic stimulus efforts in key nations will mean more demand. Traders will also keenly watch to see whether easing measures actually boost the economy as anticipated. Base Metals have risen sharply since early August along with Equity Markets.

Market analysts believe markets to be currently vulnerable to a little bit of profit-taking in the near-term and traders could opt to collect profits on the run-up and exit long positions. But I strongly feel that too may have passed on. Metals still could add gains after mild profits taking seen recently, in the short-term. Many of the base metals are yet near their marginal cost of production, apart from copper.

There could be an exponential rise in prices, particularly from silver and also those metals more supply-constrained commodities like copper, lead and other base metals. While much of the focus is on demand prospects, there is also potential for supply issues to impact base metals prices. There is huge potential for labor unrest to spread around the world.

The Chinese government and its central bank are likely to take massive action to counter any further weakening in the local economy, and launch economic stimulus programs, which should keep demand for Base Metals high. Chinese stimulus efforts are supportive for copper, although the upside could be limited by the ongoing eurozone debt crisis. Furthermore, rising housing starts and building permits in the U.S. should help the market for the short-term. Copper eased down earlier in the week as futures were in technically overbought conditions.

I say short-term and mean it, as I see this rally based more on expectations than strong fundamentals. The only fundamental supportive of gains in gold, silver and base metals is the weakening of the US dollar, which has a long way to go. Equity and commodity markets may show swifter recoveries and sharper gains, the bullishness based on a slew of easing programs in the past few weeks. Obviously, the crisis in Europe could resurface again.

Things in the eurozone may remain calm only for sometime more and may explode sooner than later in a more deadly form. Markets may, after a couple of months, suddenly pull off on the escalating uncertainty in Europe and the looming so-called “Fiscal Cliff” in the US, when automatic tax hikes and budget cuts would be triggered in early 2013 in the absence of action by Congress.

Silver is where the real action will be seen soon:
In the past 3 months alone, the price of silver has risen 25%, while gold’s recent run up, though impressive, has only been about half as strong. With gold prices at close to record levels in most markets, silver is an easier acquisition for the up and rising middle income class. There’s been a huge increase in emerging markets silver demand as more and more people move up to the middle class.

Ease of access, safety and convenience via ETFs is another reason why gold and silver are gaining market share in portfolios. Silver generally outperforms later in the longer run and tends to overshoot in either direction. While silver is unarguably more volatile, it is yet almost 40% below its highs, while gold is just 7% beneath its $1,925 peak a year ago. Spain may accept conditions and request for a bailout program and that could help relieve markets as the ECB could then start buying Spanish bonds, thereby reducing sovereign risk premia and in turn boost the euro. A rise in the euro could turn gold and silver more bullish.

The Looming U.S. Fiscal Cliff:
The unprecedented belt-tightening known as the “Fiscal Cliff” that looms over the United States could at the very least cut world growth in half in 2013, Fitch Ratings said on Thursday. Read our much earlier given alert: Forecast 2012. The fiscal cliff – a double whammy of tax increases and spending cuts totaling about $600 billion – could tip the United States and possibly the world into recession, Fitch said. “The U.S. fiscal cliff represents the single biggest near-term threat to a global economic recovery,” the ratings agency said a research note released in London. Most of the measures scheduled to take effect at the start of 2013 would reduce U.S. growth by $800 billion, or 5%, on an annualized basis, Fitch said, citing the U.S. Congressional Budget Office. Fitch said a full-scale fiscal tightening was not the most likely scenario. The scale and speed of this action would probably push the U.S. economy into an avoidable recession, slicing about two percentage points off the firm’s growth forecast of 2.3% next year. “We therefore think the cuts will be pared back to a more manageable 1.5% of GDP,” Fitch said.

ESM Bailout Fund to soon go Operational:
The eurozone’s permanent bailout fund will charge only a symbolic fee on top of its costs for loans to troubled sovereigns and only slightly more for loans to recapitalize banks, ESM pricing policy guidelines showed. The guidelines, obtained by Reuters on Thursday, said that while the price of help from the European Stability Mechanism (ESM) would be the same for every eurozone government, it would differ depending on the instrument chosen, because of different risks the instruments entailed. The ESM is to become operational in October and will replace the temporary European Financial Stability Facility (EFSF) as the eurozone’s main bailout vehicle.

It will reach its full lending capacity of 500 billion euros in 2014. The EFSF will co-exist to administer the existing three bailout programs of Greece, Ireland and Portugal, but not engage in new bailouts after mid-2013. In case of loans under a full ESM program, the fund would charge a 10 basis point margin, which the document said would not impact the sustainability of public finances of a beneficiary ESM member. The ESM would charge a higher margin of 30 basis points for money borrowed to recapitalize financial institutions, to reflect the punitive rates charged under EU state aid rules.

If Spain, or another eurozone country applied for a precautionary credit line from the ESM, the fund can use money from the credit line to buy bonds of the sovereign at primary auctions. The fund would then charge a margin of 35 bps. If the ESM were to make the same purchases on the primary market for a sovereign that is under a full adjustment program, which means it has no access to the market at reasonable rates, the margin would be 10 basis points.

If the ESM were to buy bonds of a country in the secondary market, it would charge a margin of 5 basis points because it may participate in capital gains and receives market rates. The guidelines also said that if the ESM makes a bigger profit than needed to cover its costs and the fee under the primary market support facility, it would return three quarters of the excess to the beneficiary country at the end of the plan.