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Precious Metals Unlikely To See Significant Change In 2016
All four of the precious metals registered double digit price declines in 2015 and the current global scenario does not appear conducive for a significant recovery in 2016
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Gold, once widely seen as the safe-haven to turn to when financial and political storms were brewing, ended 2015 at a low of around $1,060 per oz, marking an approximately 10% fall over the last twelve months. This was its third consecutive annual price decline. In mid December, the yellow metal fell below the $1,050 level, marking a new six-year low.
Other precious metal commodities too faced rough times during 2015. Silver is now at an all-time low near the $14 mark, with a 11% decline in prices, while platinum and palladium saw declines of around 27% and 29% respectively. The overall performance of precious metal commodities reflected the all round battering that most commodities faced, and there are indications that things may not improve significantly during 2016.
But, first let's do a quick recap of the factors that affected price movements in 2015. While early in the year, political turbulence, particularly the Russian-Ukraine stand off played a role in driving prices up, for the most part the discourse around gold prices was dominated by the possibility of a hike in US Fed rates, the first one since the global financial crisis, with the Chinese market slowdown as one of the most significant sub-themes. The Grexit crisis had a brief impact too, as did the Paris attacks, but both were temporary and soon faded into the background.
For most of the latter half of the year, expectations of the impending rate hike in the US took centre stage each time the Fed's monthly review meetings neared. Thus, when the actual increase was announced in December, the impact on prices was marginal, with most players having already factored it in.
Over the last two months, in fact, gold has been hovering at about the $1,070 mark, briefly falling below $1,050 on just one occasion before bouncing back again. This is in part due to the relatively small rate hike announced by the Fed; a larger change may have tipped the balance against gold.
Underlying the discussions around the Fed hike was the fact that the US economy was showing signs of recovery, as a result of which the dollar gradually gained in strength. With investors preferring to put their money into US currency or US stocks, their appetite for gold declined. Reasonably robust demand for physical gold, mainly for jewellery, in India and signs of a weak revival in China served as a counter balance.
While gold is predominantly driven by demand for investment and jewellery fabrication, the case of the other three preious metal commodities, where industrial demand is a major factor, is somewhat different. The global economic scenario and particularly the stronger US dollar are important drivers of prices, but there are other factors that have had an impact this year as well.
Silver has seen its price fall to a record low of under $14, and this is leading to a direct decline in production. The market is in deficit, though silver demand has been strong in the US and India. This may lead to a bounce back in 2016; and even if the gains are not significant, silver is likely to be a more attractive investment option over the year.
Platinum took a major hit following the Volkswagen crisis as it is widely used in diesel cars across the world. Fears that the metal demand from this sector would slump in the short and medium term saw major price declines as well. Uncertainty will continue to affect this segment in the near future.
Most indications are that the scenario will not change much in 2016, though it may not get significantly worse either.
In India, any cut in the import duties (currently at 10%) may lead to a surge in local demand, though if the gold monetisation scheme makes some significant headway, a portion of this demand could be met without increasing imports.
The jury is still out on when the Fed will announce the next price hike, and whether it will be more significant than the December one. The dollar is likely to remain strong on expectations that the US will continue to perform well, a situation not favourable for a revival in gold prices. Sudden unforeseen crises may even push the metal temporarily below $1,000 per ounce level, but it is more likely that the prices will be is the $1,100 to $1,200 range for the most part of the year. The other precious metals generally follow similar patterns as gold, and the shine is not likely to return to this segment in a hurry.