Commodities | May 11 2006
Chris Shaw (Tokyo)
The rally in precious metals continues, with gold pushing through US$700/oz and the other metals, silver, platinum and palladium, moving higher in sympathy.
In the view of ScotiaMocatta the precious metals have now entered overbought territory in the short-term as traders have bid up prices thanks to a combination of geopolitical concerns and a sliding US dollar. The recent price acceleration leads the group to suggest caution as they point out a price acceleration often precedes a correction. Longer-term though the group suggests the outlook remains favourable.
Any correction in the gold market in particular is likely to be met with slid buying demand, the group noting at current levels jewellery buyers have all but left the market but remain poised to re-enter on any correction.
Looking at gold specifically the group also attributes some buying to short-covering and producer de-hedging, but fund buying is dominating currently in its view. While suggesting the entry of hedge funds into the commodity markets is a structural shift that could take some time to fully flow through, the group points out the funds won’t necessarily buy at any price, so the rally can’t continue indefinitely.
The other factor pointing to a correction is the fall in jewellery demand, which it estimates could be as much as 500t this year. This may in fact bring the market back into a surplus of more than 400t after being in deficit more than 300t last year.
Scotia Mocatta also suggests some of the money being put into gold as a hedge against global economic imbalances may not stay there if the IMF is able to address the imbalances through an orderly decline in the US dollar, though such an outcome is far from a certainty.
Similarly, silver is enjoying increased interest from investment funds, which again is taking up the slack left from reduced buying by the jewellery and industrial sectors. Again though this lower demand is bringing the silver market into surplus, which would be the first time in 16 years such an outcome has occurred.
Speculative buying has driven the platinum group metals also in the group’s view, though in the case of platinum and palladium the level of industrial demand has remained firm despite the price gains.
Overall, the group suggests to prepare for a correction is the appropriate action in the current market, as the action has become too frothy and some money is likely to be withdrawn through profit taking. Looking longer-term though, the group suggests the outlook continues to be favourable so higher prices are likely.