The arrival of the new year could not have been more auspicious for the commodity market, as it has brought a lively professional activity into it. More importantly, the precious metals have reached their all-time high triggered by a confluence of factors like the supply-demand imbalances, a weak US dollar, record-high crude prices and credit market turmoil. The recent cut in the Federal Reserve Rate also stirred up the market sentiment. Precious metals are expected to be the most vibrant sector in 2008, followed by the agricultural products, base metals and energy.
J P Morgan is of the opinion that, "Precious metals have the most scope to rally given their leverage to currency markets and supply constraints. Mining supply growth is likely to be flat for gold in the next four years, while platinum and palladium are likely to remain in deficit next year." The noble metal has shown a sharp rise to $939/oz an ounce, (Graph 1) the biggest gain since 1980. Silver closed with a substantial gain of more than 35% to $18.15/oz (Graph 2) and platinum also showed a staggering growth to $2149/oz (Graph 3). Even their long-term futures contracts have continued their good performance indicating that the prospects of precious metals continue to be upbeat in the near future.
Especially in the case of gold, the reasons for the rise can be traced back to 1999, when the European central banks inked their first gold agreement. As a consequence, many mining houses faced liquidation problems as they were inundated with sudden margin calls for outstanding long-term hedge positions by their banks. During the same time, traditional investments such as bonds became vulnerable because of the excess liquidity and started yielding low returns. As a result, investors rediscovered gold as a potential risk diversifier of their portfolio. Since then they did not stop buying it, instead extended it to other precious metals like silver and platinum. |
