Precious Metals Prolong Rally as Lower Prices Lure Buyers

Market Highlights

ASIA-PACIFIC REGION

China’s CPI and exports defy expectations

The growth of consumer prices in China decelerated in December. A gauge of a price increase, CPI, rose 2.5% last month on an annual basis after adding 3% in November and was less than a forecast of 2.7% increase. Exports and imports data also missed estimates. Outbound shipments from China climbed by annualized 4.3%, while analysts had expected a climb of 5%. Meanwhile, imports jumped 8.3%, resulting in a surplus of $25.64 billion.

EUROPE

Inflation decelerates; jobless rate remains close to record at 12.1%

Inflation in the single currency union unexpectedly slowed down in December, fuelling concerns that the region is exposed to a deflation risk. CPI in the Eurozone slowed to 0.8% on a yearly basis last month compared to projections of remaining at November’s level of 0.9%. Meanwhile, jobless rate was unchanged in December at 12.1%, close to October’s record of 12.2%. Retail sales brought some optimism about the currency bloc, coming at 1.4% in November, higher than expected 0.2% and October’s reading of a 0.4% drop.

NORTH AMERICA

Trade balance shows some improvement but payrolls disappoint

The trade deficit of the world’s largest economy shrank more than forecast in November amid a large decline in oil imports. Exports soared 0.9%, while imports declined 1.4%, pushing the trade deficit to the lowest level since October 2009 to $34.3 billion. Experts called for a gap of $40.2 billion after it inched down to $39.3 billion in October. The data from the jobs market was mixed. The jobless rate dropped to 6.7% from 7% as more people left the labour force, whereas payrolls rose at the slowest pace since 2011; payrolls added 76,000 in December compared to a forecast of 197,000 and November’s figure of 241,000.

Precious Metals Prolong Rally as Lower Prices Lure Buyers

Gold ended higher last week as lower prices continued to lure buyers on the market. In 2013, the yellow metal posted the largest annual decline since 1981 amid a combination of slowing monetary stimulus in the U.S, stronger U.S. Dollar and weaker India’s demand. However, a fall in prices had its positive side too; it was already said that lower prices stimulated physical demand for the yellow metal, especially in China.

Returning to the developments happening last week, we also may note that such factors as Fed tapering case and greenback’s appreciation remained the key drivers of the yellow metal’s prices. For example, mixed labour data from the U.S. pushed the U.S. currency lower as well as calmed worries that the Fed will reduce its stimulus further thus helping the most popular precious metal to finish the week with a 1.77% gain.

Silver prolonged its rally, finishing the week with a 0.47% rise. Being strongly correlated to its more expensive peer, the grey metal gained momentum after a jump in gold prices. At the same time, unlike gold, silver may try to seek support on rising consumption in India. India’s silver imports totaled 3,000 tonnes in the first half of 2013 compared to 1,900 tonnes in the whole 2012.

Platinum and Palladium added more than 2% over the week after a sharp advance in the week ended January 3. The platinum group metals were supported by falling supplies and rising demand from auto-industry. Total vehicle sales in the U.S. edged lower to 15.4 million units in December, slightly less than expected but remained close to the highest level since 2008. Meanwhile, recent labour disputes in South Africa and declining Russia stockpiles provided supply-side support.

Industrial Metals Decline After Gloomy U.S. Payrolls Data

Aluminum came off last week’s highs as support pertaining to positive PMI releases from the U.S. and Europe started to fade away. Market participants again focused on the supply-demand imbalance that was weighing on the base metal throughout last year. According to the latest data, aluminum market was likely to expect surplus of 5.86 thousand tonnes last year despite a 4.9% decline in global output in the period between January and November 2013. However, forecasts that China’s demand will soar 10% year-on-year in 2014 as well as overall recovery of the world’s economy may boost prices in the long-term perspective.

Copper dropped 1.02% as strong selling pressure came from Chile where output of the red metal grew 6.7% year-on-year to 5.25 million tonnes in the first 11 months of 2013. Notwithstanding a supply increase in January-November period, news from Chile also gave some stimulus for copper prices to recover losses as port workers’ strike in the country is liming exports thus restricting supplies by the world’s top producer.

Nickel dropped amid waning support from Indonesia’s ban on metal ore exports that is due to come in force on January 12. Indonesia accounts for 18-20% of total global nickel production. The support started to weaken thanks to availability of alternative suppliers and rumors that Indonesia may alter its regulation as ban may severely hit the strategic industry of the country.

Zinc sagged 2.22% despite falling LME inventories and hopes for stronger demand amid improving global economy. LME inventories slumped 2.33% last week and plunged 25.48% over 12-month period.

Energy Futures Plunge Despite Upbeat EIA Data

WTI and Brent oil started the week on the positive side amid record cold temperatures and signs of economic progress in the U.S. Worries that clashes in Iraq will impact oil supplies provided additional boost for Brent prices. Iraq Anabar’s province was the center of turmoil as Sunni Muslim decided to combat with government’s effort to get control over the region. Brent oil also took advantage on falling shipments from the North Sea. Cargoes from the North Sea will drop to five shipments of 600,000 barrels in February. However, the upside was limited due to a restart of production in Libya. Libya, holder of the biggest oil reserves in Africa, restarted operations on January 4 after a four-month long halt.

The advance in energy prices was short-lived as on Wednesday both WTI and Brent oil lost ground even despite a bullish EIA report. The EIA data indicated that the U.S. inventories dropped 2.7 million barrels in the week ended January 3 compared to expectations of a 1.6-million-barrel decline and a previous week’s slump of seven million barrels.

Natural gas was trading higher in the first two days of the week as record low temperatures in the U.S. improved demand for the heating fuel. However, shortly after the freeze abated, forecasting agencies started to call for warmer weather thus putting a heavy pressure on the commodity. Meanwhile, natural gas storage in the U.S. dropped more than predicted, by 157 billion cubic feet last week.

Heating oil ended the week on the negative note as the EIA report showed larger-than-expected increase in the U.S. supplies. Distillate fuel inventories, which include diesel and heating oil, rose 5.8 million barrels in the week ended January 3 versus expectations of a 1.9-million-barrel jump.

Farm Commodities Stronger on Rebalancing, U.S. Cold

Wheat rallied early last week on concerns over record low temperatures in the U.S. that were expected to damage winter varieties. Temperatures across the wheat belt dropped to more than a 20-year low on the weekend and the first two days of the week. Moreover, funds’ portfolio rebalancing was a positive factor as wheat was 22% down year-on-year in 2012. However, on Wednesday, the grain started feeling the downside pressure because of ideas that record freeze failed to damage U.S. winter wheat thus harvest is likely to be as estimated earlier, at a six-year high next season.

Corn like wheat received a seasonal boost from index rebalancing as last year the commodity plunged around 40%. At the same time, weak U.S. export and ethanol consumption data took a toll on the corn prices. The U.S. sold only 19.3 million bushels of corn in the week ended January 5 that was well below forecasts. Meanwhile, U.S. ethanol production inched up 6,000 barrels per day last week ; however, a 556,000-barrel rise in stockpiles raised concerns over demand for the biofuel. Also putting pressure, JC Intelligence reduced to 2.2 million tonnes its China’s import forecast, citing recent rejections of several U.S. cargoes.

Soybeans was bolstered by upbeat U.S. export numbers that showed that demand for the U.S. oilseed rose 56.4 million bushels in the week ended January 5 compared to 43.7 million bushels in the previous week. From the negative side, weather in Argentine and Brazil continued to improve thus adding to the world’s supplies.

Coffee was unwilling to dive below 100 cents per pound. Index rebalancing that usually takes place in the beginning of the year and aims to buy the top laggards among commodities to restore weighting pushed coffee that lost over 23% last year higher. Relatively strong Robusta coffee prices also supported Arabica beans.

EXPLANATIONS

Commodities

• Gold - COMEX active contracted (USD/t o.z.)

• Silver - COMEX active contract (USD/t o.z.)

• Platinum - New York Mercantile Exchange active contract (USD/t o.z.)

• Palladium - New York Mercantile Exchange active contract (USD/t o.z.)

• Aluminum - Active contract of primary aluminum of minimum 99.2% purity at the LME (USD/MT)

• Copper - Active contact of electrolytic copper at the LME (USD/MT)

• Zinc - Active contract of zinc od minimum 99.995% purity at the LME (USD/MT)

• Nickel - Active contract of nickel of 99.8% purity at the LME (USD/MT)

• Crude oil - light, sweet crude oil active contract on the New York Mercantile Exchange (USD/bbl.)

• Brent oil - Brent oil active contract on the ICE Futures Europe (USD/bbl.)

• Natural Gas - natural gas active contract on the New York Mercantile Exchange (USD/MMBtu)

• Heating oil - heating oil active contract on the New York Mercantile Exchange (USD/gal.)

• Wheat - wheat active contract on the Chicago Board of Trade (cents/bu)

• Corn - corn active contract on the Chicago Board of Trade (cents/bu)

• Coffee - benchmark Arabica coffee active contract on the NYB-ICE Futures Exchange

• Soybeans - active contract on the Chicago Board of Trade (cents/bu)

Indices

• S&P GSCI Precious Metals Total Return Index - commodity group subindex composed of gold and silver; the index reflects return on underlying commodity futures price movement

• S&P GSCI Industrial Metals Total Return Index - commodity group subindex composed of futures contracts on aluminium, copper, lead, nickel and zinc

• S&P GSCI Energy Total Return Index - commodity group subindex composed of futures contracts on crude oil, Brent oil, RBOB gas, heating oil, gas oil and natural gas

• S&P GSCI Agriculture Total Return Index - commodity group subindex composed of futures contracts on wheat, red wheat, corn, soybeans, cotton, sugar, coffee and cocoa

Indicators

Long-term price forecasts - aggregated price forecasts based on predictions of 20 international banks forecasts

USDA Wasde Total Estimated Inventories (Today) - current level of inventories of wheat in 1000 MT, corn in 1000 MT, soybeans in million bushels and green coffee in 1000 bags