Market Review (21st Oct 2011 to 05th Nov 2011)
Gold managed to break out of the $1700/oz in the fortnight with the biggest fortnightly gain since 2009. The rally was supported by weakness in US dollar, rally in commodities and ETF buying. Gold rallied to $1766.5, the highest level in more than a month, before closing at $1756.1. At COMEX ,Gold December contract gained by USD 143.20/Toz while COMEX Silver Dec contract gained by 380.30 cents/Toz. In the same period, MCX Gold December contract gained by Rs. 1557.00/10 gram and MCX Silver Dec contract gained by Rs 4557.00.00/Kg. At NSEL, Ahmadabad spot Gold gained Rs. 1489.00/10 gram and Silver gained by Rs. 4110.00 /Kg. NSEL Demat E-Gold gained by Rs. 161.80/ gm while NSEL Demat E-Silver gained by Rs. 444.50/ 100 gm.
Gold gained due to 3 key factors. Firstly, is the expected weakness in US dollar. Fed announced no change in interest rates and stimulus measures. Gold bulls found a reason for accumulating the yellow metal as the Fed funds rate will remain at exceptionally levels for at least until mid-2013 and the eventual implementation of 'QE3' will weaken the US dollar. Secondly, the ECB surprisingly cut the main refinancing rate by -25 bps to 1.25% at the November meeting, Similar to the case of the Fed, gold benefits as the ECB keeps interest rates low. Thirdly, ups and downs of market sentiment were driven by Greece which had called for a referendum of the EU bailout plan agreed in late October but then cancelled. These questions raised uncertainty in the sovereign debt crisis in the region and euro's outlook.
Financial markets rallied across the board in the fortnight as mainly driven by announcement of the EU rescue package on the sovereign debt crisis in the Eurozone. Precious metals advanced as the U.S. dollar lost strength, which eased the downside pressures forced on the dollar-denominated commodities to trade higher, especially after finance ministers in the euro region agreed to hand Greece the European Union part of the sixth portion of last year's bailout package, worth eight billion Euros, by mid November. Meanwhile higher ETF buying also lent support to prices.
EU members came together with a unanimous decision to resolve their debt problems. EU leaders announced a plan, which will include a voluntary 50% write-down on Greek debt by private investors while the bailout fund will be increased to around $1.4 trillion or about five fold its earlier size and European banks will be recapitalized with as much as EUR106 billion. The outcome of EU summit reduced demand for safe haven assets however; it triggered a rally across commodities lending further support to gold prices. Euro rallied sharply against the dollar on optimism about the debt deal and this lent further support to dollar denominated gold prices.
On fundamental side Silver also jumped nearly +13.00% during the fortnight. Indeed, physical demand has been strong at price low 30 dollars. Meanwhile China's silver imports fell -39% YoY to 264.7 tons in September, the lowest level since February. Yet, China remained a net importer of the metal as exports plunged -44% YoY to 83.5 ton. Despite volatility of the trade data, China as a new importer of silver has been a constant for 2 years although it's a producer of the metal.
Outlook
Gold has moved in sync with commodities in general for last few days however, it has shown signs of breaking this trend. The sharp volatility in commodities at large will continue to affect gold prices in the near term. However, long-term outlook remains good for gold. Weakening outlook for major economies especially the US and Euro-zone will support gold's demand as a safe haven asset. Euro-zone debt problems have intensified in last few days amid uncertainty about additional financing for Greece and rating downgrade for other economies. We retain our view that gold's uptrend will resume as long as global economic outlook remains uncertain and central banks maintain interest rates at exceptionally low levels.
