Precious Metals Outlook

Transcription

1 Karvy Comtrade Ltd. Precious Metals Outlook Q Buy COMEX Gold in the range of targeting 1300 then 1340 with stop loss at 1100 Buy MCX Gold in the range of targeting then with stop loss at Buy COMEX Silver in the range of targeting then with stop loss at Buy MCX Silver in the range of targeting then with stop loss at July 2010

2 Economic Review The world economy has seen turbulent times in the last 2-3 years, as the world s deepest recession since 1929 emerged in 2008 and spread like a conflagration across the globe, pushing world s major economies down. However, increased cooperation across countries helped the world leaders tame this recession. Trillions of dollars were poured into financial systems and monetary policies were relaxed in an effort to fight the recession. As an effect of accommodative monetary policies world-wide, macro-economic indicators started turning positive from the third quarter of Asia led this global economic recovery with the US also emerging from the recession. Asia s two economic giants; India and China, gained their earlier growth momentum and continued to be important driver of the Asian recovery. When green shoots of recovery were springing up, yellow weeds in the form of European debt crisis, which is nothing but an off-shoot of the recent financial recession, dashed them. Debt worries were first observed in Greece when the country s fiscal deficit reached nearly 12% of GDP a way above Euro-zone s prescribed limit of 3%. Debt woes emanated from Greece crept into Portugal, Spain, and Ireland. Now, dark clouds of the same spreading beyond Europe are hovering over global financial markets. Although these sovereign risks were seen in the first quarter, these heightened in the subsequent quarter with investors confidence bottoming in the markets. Sovereign debt ratings were continuously downgraded which resulted in skyrocketing bond yields. Greece bonds have recently been downgraded to junk status after it s yields soared above 9% levels since these were launched. Spain s credit rating was also downgraded during the quarter and thus, making Spanish bond not ideal for investment purposes. Markets did not even respond to the European Union s $1 trillion rescue package for debt-laden euro zone nations as investors felt the plan doesn't fix the structural fiscal imbalances that impair countries like Greece, Spain, Portugal, and to a lesser extent, Italy and Ireland. The massive aid package only buys time for these embattled states to execute much-needed corrective policies. Investors risk appetite towards riskier assets declined which eventually turned out to be a blessing in disguise for relatively safer investments such as Gold and the dollar. Though there are some fears that European debt crisis may reach the US and disturb their recovery, yet the US economic momentum seems resilient to cope with the Euro-zone debt crisis. The US economy may, in fact, benefit from the Eurozone crisis, since the Euro s continued weakness will secure the dollar s status as a global reserve currency. Thus, this ongoing debt crisis may not outweigh the upward momentum. Reports showed that unemployment rate in the US has bottomed to 9.7% in May since it peaked to 14-year high of 10.20% in November last year. Industrial production has been on the continuous rise over the last one year. However, housing sector may be exposed to risks because of the Federal government s tax gain to first-time home-buyer policy expiring in June. This may have resulted in a decline in both housing starts and building permits in May month. Equity markets also borne the brunt of ongoing debt crisis, as fear factor led to a general sell-off in the markets. But, this is expected to have only a temporary dampening effect on some growth indicators and may unlikely act as a drag. On the other hand, performance of Asian economies has been strong and outlook remains relatively positive, we are not yet out of the woods. Global developments also influence Asia s growth, given Asia s high dependence on export demand and its growing integration with international financial markets. Recent development in Europe will continue to be reflected in financial market volatility all across the world. Asian equities have also been hard hit, as global outlook is subject to downside risks amid current happenings in the Europe.

3 Gold: Climbing on the Wall of Worry Bad financial news kept on flowing in which proved to be a serious dampener on the world financial markets. Financial markets, largely, remained uncertain with every bet carrying higher risk. One big negative news European debt crisis continued to come in the form of odd snippets and unshackled the global financial markets. Gold looks still to be the best wealth protection option out there. Quarter 2 of the current year 2010 saw bullion prices recording new highs, both on Comex and MCX. A larger section of investors community resorted to gold when all other investment assets were not performing well. Equities remained quite uncertain. Bonds also failed to attract their flight-tosafety demand because of continued sovereign risks prevailing in the market. Investors were tired of low interest rate scenario in the west which means no significant returns on bonds. Other commodities also witnessed a general sell-off as the fear factor continued to persist in the market. Asset Class Q2 2010* 2010 (YTD)* 2009 Gold 11.91% 13.66% 23.96% Silver 6.50% 11.00% 49.25% Crude Oil -9.71% -4.70% 77.94% LME Base Metals S&P GSCI Commodity MSCI World Index for Stocks % % 97.50% -6.60% -5.61% 50.30% % % 26.98% Dollar Index 6.10% 10.48% -4.24% *Returns are calculated till June 30, 2010 After having made life-time high of $1226/oz in December last year, gold prices consolidated in the range of $ $1163/oz in Q Subsequently, debt issues in the Euro zone erupted again in the Q2 with a series of downgrading of sovereign bonds of debt-laden European nations. This led to gold exit its range bound trading and reach new highs in June Gold traded in the range of $ $ /oz with $ /oz being gold s peak levels. The dollar was another gainer from ongoing debt concerns. During the quarter, the dollar advanced close to 10% against the Euro and 6.10% against a basket of the world s six major currencies, including Euro. Chart 1: Comex Gold and the Dollar Index Comex Gold Dollar Index 1/4/2010 2/3/2010 3/5/2010 4/4/2010 5/4/2010 6/3/2010 CFTC reports suggest nearly 28.81% increase in Comex gold s total open interest to 601,138 contracts during the quarter, with non-commercial holders (speculators) continued to go long, betting that prices will rise. Speculators added more than 33% to their long positions which resulted in their net long positions rising by spectacular 41% to 244,725 contracts for the week ended on June 29, 2010 from 173,766 contracts on March 30, Speculators were inclined to take more long positions because of current debt crisis in the Europe which boosted gold s safe haven demand. Commercial holders also added both long and short positions by more than 40%, each

4 It was mainly safe-haven demand driven rally as economic uncertainties stoked gold s demand. Gold was also bought as an alternative to rising volatility in currency markets. Uncertain and volatile currency markets took gold prices to new highs in many currencies i.e. Indian Rupee, Dollar, Euro, Pound, Yen, Swiss Franc, Canadian Dollar etc. Prices have soared to $ /oz on Comex and Rs. 19,198/10 gm on MCX. This was truly a bull run for bullion prices. Chart 2: Gold Prices in Dollar and INR Comex Gold ($/Oz) - LHS MCX Gold (Rs. /10 gm) - RHS Chart 4: Gold Prices in Yen and Canadian Dollar Yen-priced Gold ( /Oz) - LHS Canadian Gold (CAD/Oz) - RHS 1/4/10 2/8/10 3/15/10 4/19/10 5/24/10 6/28/ Chart 5: Gold Prices in Swedish Krona & Swiss Franc /4/10 2/8/10 3/15/10 4/19/10 5/24/10 6/28/ Swedish Gold (SEK/Oz) - LHS Swiss Gold (CHF/Oz) - RHS Chart 3: Gold Prices in Euro and Pound Euro-priced Gold ( /Oz) - LHS Pound-priced Gold ( /Oz) - RHS /4/10 2/8/10 3/15/10 4/19/10 5/24/10 6/28/ /4/10 2/8/10 3/15/10 4/19/10 5/24/10 6/28/ The dollar index saw an appreciation of 6.10% during the quarter; means constituent currencies were seen falling against the dollar. This was one of the main reasons gold rising in other currencies. Bullion investors might have bought the yellow metal in the wake of declining value of their home currencies.

5 Metric Tons $ /oz Gold s investment demand in this period (Q2 2010) was also robust as the world s largest gold ETF, SPDR Gold Trust, increased its gold holdings by tonnes to a phenomenal level of MT as on June 30, Chart 6: SPDR Holdings and Gold Prices 1,400 1,200 1, SPDR Holdings Comex Gold Spot 1,400 1,200 1, Gold Crude Ratio: Gold crude ratio remained steady in the first quarter of 2010 while in the second quarter, it showed heavy movement upwards. It took a giant leap to in the middle of the quarter from in the beginning of the quarter. This was mainly because of a break-up in their relationship when both moved in inverse direction. Gold rose nearly 12% while crude oil prices declined more than 9.5% during the quarter. The co-relation between gold and crude was in Q while the same turned around to in the subsequent quarter We are expecting the historical positive relationship between gold and crude to resume which will possibly result in the ratio to come down. - Q1'05 Q4'05 Q3'06 Q2'07 Q1'08 Q4'08 Q3'09 Q2'10 Gold Silver Ratio: Gold silver ratio fluctuated in the range of with an average level of in Q2 2010, little changed from average ratio of in the previous quarter. In both the quarters, ratio remained on higher side initially, with a pullback thereafter. - Chart 8: Gold Crude Ratio Q Average: Q Average: The ratio is currently hovering at 65 levels, a way above its historic average of around levels. Chart 7: Gold Silver Ratio Q Average: Q Average: Jan-10 4-Feb-10 4-Mar-10 4-Apr-10 4-May-10 4-Jun Jan-10 4-Feb-10 4-Mar-10 4-Apr-10 4-May-10 4-Jun-10 Rising international gold prices also triggered upward moves in MCX gold futures which rose nearly 16% during the quarter. MCX gold reached all-time high of Rs. 19,198/10 gm. Apart from higher international gold prices, rupee depreciation was a supplementing factor to gold s rally. Indian rupee (spot) depreciated as much as 6.30% to with eventually 3.41% lower at Rising bullion prices in India depressed physical demand, to a certain extent. Indian gold imports in the first five months of this year stood at around 150 tonnes as compared to nearly 70 tonnes during the corresponding period last year. India has a huge pent-up demand which may be seen this year but

6 January February March April May June July August September October November December higher gold prices may be a bottleneck. Last year, India s gold imports fell to nearly 216 tonnes against the normal consumption of around tonnes annually. The reason could be attributed to higher prices and the country also recovering from recessionary effects last year. Interestingly, prices are still hovering at levels which can not be digested by Indian consumers. Many prospective buyers are putting their buying plans on sidelines. However, there could be some buying activities seen in the market as consumers will be forced to buy gold amid a large number of marriages scheduled this year. Chart 9: India Gold Imports Source: KCTL Research Current rise in prices also exhibits that investors are cautious about putting their money into riskier assets and the gold seems to be the only safest haven for parking their investments. Therefore, gold is climbing on the Wall of Worry. Investment demand may continue to remain firm and contribute to higher bullion prices. ETFs could be seen as decent proxy to gauge the strength of retail investors demand and these vehicles have seen substantial inflows in the recent past. The world s largest gold ETF, SPDR Gold Trust, accumulated nearly 180 tonnes of gold during the second quarter of Outlook Investment demand in emerging nations like India and China has grown substantially. This is mainly because of rising income, the launch of various gold investment products and some apprehensions over other investment alternatives, such as equity and real estate. In India, total gold holdings under ETF s rose over 100% on year to tonnes in May, buoyed by festival buying. Though gold collections under ETFs are growing, they remain miniscule if compared to India s consumption of about tonnes annually. Gold s uptrend is expected to remain intact which is heavily influenced by current macroeconomic environment. We believe that continued uncertainty in broad market will drive investors demand for gold. In addition to investment demand that rules the roost, gold remains bullish on following grounds; Low interest rate scenario in the West to be continued which will boost the demand for gold as an alternative investment, Potential GDP growth has come under pressure due to persisting debt woes in the Europe. Lowering growth prospects in the global economy are positive for bullion prices, Central banks may also be net buyers of gold given concerns over valuations of other securities in their portfolio. According to the World Gold Council report, central banks of Russia, the Philippines, Kazakhstan and Venezuela have been buying gold. Recent revelations of large central bank purchases should lead to higher gold prices. Very importantly, central banks became net buyers of gold in Q2 09 for the first time since It seems possible that this is likely to be a continuing trend for the foreseeable future.

7 Technical Analysis Gold gained more than 11% in the last quarter which was an outcome of bounce back from the support $ (February low) level of the channel formation as depicted in chart. Moreover, market continued the bullish movement as prices traded above 13, 22 & 45 EMA. Market is witnessing an upward Channel formation implying market is likely to trade in upward range bound movement in the next quarter. On monthly chart, prices are trading well above 13, 22 & 45 EMA suggesting bullish view for the quarter. Last quarter, prices have closed above the upper band of Bollinger band (20) which suggests higher movements. The momentum indicator, RSI (14) monthly is treading at 0.69 and still has the potential to move higher. The leading indicator, Stochastic (5, 3) is treading at 0.80, implying prices may suspend/pause the northward movement for short-term. Last quarter, market has witnessed closing (1245.5) near high price ( ) indicating high bullish sentiments. Elliot Wave analysis Elliot Wave analysis suggests market has the potential to see a correction till $1175 and then $1154 levels, described as minor wave 4. After having made a low of $1185, if market fails to create a new low, it may possibly resume uptrend thereafter. In short to medium term, market is in bullish mode. As per the expectation, if market starts rising from a low of $1175, it will lead the rise till $1300 or it can extend up to $1325 which is nothing but minor wave 5. Outlook- The market is expected to trade sideways to higher during the next quarter. Henceforth, market may witness correction till level which may act as support level. However, sustain above these level may drive market to test 1298 then 1350 levels. Levels S2 S1 R1 R2 Comex ($/oz) MCX (Rs/10 gm) Buy in the range targeting 1300 then 1340 with stop loss at Buy in the range targeting then with stop loss at 17300

8 Silver Silver possesses properties of both a precious metal and an industrial metal which makes this white metal follow both gold and base metals. Being precious metal, silver moves inversely to the currency i.e. dollar. It gains buoyancy when its industrial uses rise. Sometimes, this white metal can take off on its own without taking cues either from gold or base metals. Silver witnessed sharp fluctuations in the recent past due to volatile markets, triggered by Euro zone debt crisis and other occasional news appearing in the market place and leaving markets with greater impact. Euro zone debt crisis has simply questioned the recovery of global economy. The metal s industrial and investment demand took a backseat amidst such grave concerns of European debt issues. The world s biggest silver ETF, Ishares silver trust, reduced its silver holdings by 316 tonnes this year, inclusive of over 100 tonnes in the second quarter. Comex silver prices advanced 6.50% in the second quarter of the year The metal witnessed considerable fluctuations and traded between gains and losses, as Euro zone concerns heightened after investors failed to digest European Union s $1 trillion bail out package for debt-laden European nations. Silver traded in the range of $ $19.85/oz in Q Similarly on MCX, prices traded in the range of Rs. 26,740 Rs. 30, 163/kg with nearly 10% gains. Rupee was the most significant factor which distorted the parity price of silver in India which further led silver prices to put extra gains on the board. Silver, gold s poor cousin, followed the yellow metal to take further direction in the market. Silver generally outperforms gold due to its exaggerated moves, but recent times proved to be good for gold as gold remains the king of turbulent times. Silver rose 6.50% while gold advanced by 12% on Comex. In comparison with base metals, silver broke their strong relationship with the metals segment during the quarter. Historically, both silver and LME s base metals index (LMEX) moved in similar fashion with a co-relation level of The co-relation turned around to in Q from in Q In terms of their quarterly returns, silver saw gains mainly imparted by gold while base metals witnessed heavy selling pressure during the quarter. Silver rose 6.5% on Comex while LMEX slipped by nearly 17%. Chart 10: Comex Silver and LME s Base Metals Silver Base Metals 4-Jan-10 3-Feb-10 5-Mar-10 4-Apr-10 4-May-10 3-Jun-10 Source: KCTL Research Recent volatility, led by continued debt woes in Europe, helped precious metals benefit the most as investors resorted to precious metals to safeguard their wealth amid such turbulent times. Silver has still not been given its due attention as investors focus more on gold to protect themselves against currency market fluctuations. Gold may remain the king of turbulent times, but silver will move on when situations turn around. Silver will see increased investors interest as this white metal is trading more than 60 percent below its 1980 high of around $50/oz. Silver s more volatile price patterns make this white metal a better bet in comparison with gold. Though, the higher volatility should be taken in both the downside and the upside moments. If gold is in an upwards trend, as we think, then a parallel rise in the silver price could be much greater in percentage terms.

9 Considering gold-silver ratio, which has historically been trading in the range of in the recent years, and is now hovering above 65 levels, suggests that there could be a good catch up from silver ahead. Even at the current gold price level, a ratio of 50:1 would put silver at over $24 an ounce which would represent a very sharp percentage increase from current values. Silver has also got industrial usage element in its kitty so the global economic conditions and the apparent lack of growth outside Asia, has partly held this white metal back. But, it s growing usage as a biocide in wound treatment, water purification; general hospital usage etc. would eventually provide silver its due gains. In the recent Silver survey, GFMS Ltd. Executive Chairman Mr. Philip Klapwijk said that silver prices may climb more than gold this year as economic growth triggers demand for plasma television, batteries and other industrial applications. Investment demand is also likely to rise which may lead silver prices to trade as high as $20/oz this year, according to MR. Klapwijk. GFMS forecasts silver to trade between $16.40 and $19.50/oz in the short-term. Technical Analysis Silver witnessed an upswing as market was trading above 13, 22 & 45 EMA and thus, maintained bullish sentiments by gaining 6.5% during the Q2. Market continued to make new highs and lows with sentiments propelling the market to move upside. The momentum indicator, RSI (14) monthly is treading at 0.62 suggesting further upside. Market is in channel formation expected to trade with positive bias in Q3. Prices are trading well above 13, 22 & 45 EMA monthly, implying strong bullish sentiments. Candlestick pattern suggests market to remain upside with high volatility. Market may trade sideways to higher for the next quarter. Henceforth, silver may witness a correction up to $16.80 and then $16.40, before resuming the uptrend. However, on break and sustain above $19.80 level may drive market to test $ Levels S2 S1 R1 R2 Comex ($/oz) MCX (Rs/kg.) Buy in the range targeting then with stop loss at Buy in the range targeting then with stop loss at 25200

10 Disclaimer The report contains the opinions of the author that are not to be construed as investment advice. The author, directors and other employees of Karvy, and its affiliates, cannot be held responsible for the accuracy of the information presented herein or for the results of the positions taken based on the opinions expressed above. The above-mentioned opinions are based on the information which is believed to be accurate and no assurance can be given for the accuracy of this information. There is risk of loss in trading in derivatives. The author, directors and other employees of Karvy and its affiliates cannot be held responsible for any losses in trading. Commodity derivatives trading involve substantial risk. The valuation of the underlying may fluctuate, and as a result, clients may lose their entire original investment. In no event should the content of this research report be construed as an express or an implied promise, guarantee or implication by, or from, Karvy Comtrade that you will profit or that losses can, or will be, limited in any manner whatsoever. Past results are no indication of future performance. The information provided in this report is intended solely for informative purposes and is obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. We do not offer any sort of portfolio advisory, portfolio management, or investment advisory services. The reports are only for information purposes and not to be construed as investment advice. For a detailed disclaimer please go to following URLs: