Bullion to trade higher on economic uncertainty

2009 was a bumper year for bullion investors as both gold and silver reached record highs in domestic and international markets.

Precious metals are likely to remain bullish in 2010 due to their status as safe haven investment avenue at the time of economic crisis. Major global economies are now planning to withdraw stimulus packages they offered during the last financial crisis which began with the Lehman Brothers’ collapse in September 2008. Analysts fear that the proposal may hurt the ongoing steady recovery in global economy once again, thereby, forcing diversion of funds to precious metals especially gold and silver.
 

SHINING STARS Price behaviour (in Rs)
Metal	Jan 2, ‘09	Dec 29, ‘09	Chg (%)
Gold (99.5) / 10 gm	13,575.00	16,760.00	23.46
Gold (99.9) / 10 gm	13,635.00	16,850.00	23.58
Gold (MCX-near month)/10 gm	13,559.00	16,810.00	23.98
Silver (spot/kg)	18,385.00	28,000.00	52.30
Silver ($/oz)	11.57	17.10	48.00
Silver (MCX-near month)/kg	18,599.00	27,526.00	48.00
Gold ($, London spot)/oz	875.00	1,096.83	25.29
Rupee (vs dollar)	48.75	46.67	4.27
Crude ($/barrel)	47.78	76.95	61.00
Crude (MCX — near month)	2,224.00	3,681.00	65.51

According to Religare Commodities, precious metals market is expected to consolidate in the first quarter as the tussle between dollar bulls and physical bargain hunters set to continue. The weakness in fiat currencies and further turmoil may provide cushion to precious metals with gold and silver to move in between $850 and $1,400 an ounce (oz) and $13-23 an oz respectively. In rupee term, however, both heavily traded bullions are forecast to move between Rs 14,000-19,500 per 10 gm and Rs 21,000-34,000 a kg.

2009 was a bumper year for bullion investors as both gold and silver registered records in domestic as well as international markets. Gold price scaled a new summit at $1,227 an oz but, the gains could not sustain due to strength in the dollar. A notable characteristic of the rally was the strong investment demand coupled with abysmally low physical demand with a notable exception being the purchase of 200 tonnes by the Reserve Bank of India (RBI).

Although, investors may see excellent buying opportunity in the third quarter, yet the dollar could be the key driver of the bullish sentiment. Kotak Commodity & Services believes that physical buying interest, most notably from India, the largest consumer, is expected to return once the price slips below the crucial level of $1,000 an oz.

Meanwhile, silver outperformed gold on expectations that industrial demand may return. Investment demand is expected to remain strong in 2010, but a rebound in fabrication demand (that covers silver’s use in industry, photography, jewellery manufacturing and in making coins) should see buying pressure increase. But, the metal’s outperformance may change this year in relation to gold, especially if the present weakness in bullion persists. Falling warehouse inventory levels should be a mildly supportive factor for the silver price. Inventories in comex warehouses fell about 12.5 per cent year-to-date.

In 2009, China surprised the market in April, when it announced its gold reserves had increased 76 per cent to 1,054 tonnes since 2003 level of 600 tonnes. However, this higher holding still represents only 1.9 per cent of total reserves.

Funds may not find better return options in other commodities including crude oil which shot up from $40 in the beginning of the last year to $80 towards the end. Since, Opec is unlikely to alter the output levels during the year, crude oil prices are estimated to remain stable in 2010. The International Energy Agency has revised its forecast for 2010 global oil demand, up by 130,000 barrels a day, which is now expected to average to 86.3 million barrels a day. That represents an increase of 1.7 per cent, or 1.5 million barrels a day, compared to 2009. However, under inflationary pressure, crude oil may hit $100-110 a barrel by the end 2010.

According to a report by Angel Broking, investment demand for gold could remain intact in the coming year as the global central bankers doubt the role of the dollar as a global reserve currency.

Hence, central banks want to accumulate gold in their foreign-exchange reserves. The recent global financial crisis that had its roots in the US had disturbed the financial dominance of the US as a global economic power.

In the coming years, the Asian giant China could take over as the world’s largest economy and it would take over the role of the US as a major economic power.

This could lead to higher demand for precious metals as the dollar could weaken in the coming years and make bullion look as an attractive investment from a long-term perspective.