Friday, May 1, 2009


Should US banks be nationalised?

There is a heated debate under way in the United States between those who believe that the economic policy conducted currently (very expansionary fiscal policy, massive monetary creation linked to the Federal Reserve’s purchases of various assets, measures aimed at driving down long-term interest rates, etc), will eventually kick-start activity and those (such as Paul Krugman) who believe that it is necessary to go much further, and in particular to nationalise banks in order to clean up their balance sheets and jump-start credit.

Should US banks be nationalised? The answer is positive if:
− without nationalisation, banks will ration credit,
− and if the credit crunch will prevent an economic recovery.

We believe that the real problem is not the nature of the banks’ shareholders but the cost of long-term funding for the banks; this problem can be settled by specific measures (loans guaranteed at more favourable conditions, transparency on the value of "toxic assets"), but not by nationalisation.

1 - Everything seems to have been tried to jump-start banking credit in the United States
The US administration and the Federal Reserve have implemented:

− a very expansionary monetary policy;

− purchases of real-estate related securities (the Federal Reserve’s purchases of Agency bonds and MBS, up to USD 1,450 billion), in order to drive down mortgage interest rates and encourage mortgage refinancing, which has been efficient;

− guarantee on the debts of Freddie Mac and Fannie Mae, which has markedly reduced their borrowing costs;

− asset purchases (including Treasuries) by the Federal Reserve;

− guarantee of debt and equity for funds that are to purchase banks’ toxic assets (PPIP programme, up to USD 700 billion);

− incentives to renegotiate and refinance mortgage loans (Housing Bill, providing up to USD 1,000 bn to the FHA);

− a guarantee on bank loans by the FDIC, up to USD 1,400 bn.

To see full report: SPECIAL REPORT


Downgrade to Hold: Factoring in US$10 GRM + E&P Upsides

Wait for better risk reward — Stock leaves little upside to our new target price of Rs1835 (from Rs1475) which factors in: (i) E&P value at Rs729, 40% premium to NAV thus factoring in meaningful reserve upside, (ii) stable refining margins (blended assumption of US$9.7-10.8 over FY10-11E), and (iii) roll fwd to Mar-10E with ref/petchem valued at 6x FY11E EV/EBITDA. Downgrade to Hold (from Buy) with Low Risk rating (from Medium Risk).

How much to pay for FY11E and E&P upside now? — Though we expect 28% earnings CAGR over FY09-11E, RIL is trading at PER of 11x FY11E. Current valuation recognises the superior earnings mix (KG is 38% of FY11E EBITDA) and the upside potential in E&P, but leaves low margin for error in the cyclical businesses. A more constructive view on the stock is contingent on (i) material improvement in refining/petchem outlook, and/or (ii) stock correction.

4Q slightly below — EBITDA at Rs54.4bn was impacted as GRMs ($9.9/bbl) were lower due to weak diesel spreads. Premium to Singapore was lowest in last 10 qtrs. Polymer margins and volumes rebounded in 4Q after production cuts in 3Q. PAT (adj.) however beat expectations due to higher other income.

E&P - D6 under control, new exploration will have to wait — Company is aiming at 40mmscmd by end-Jun and 80mmscmd by end-FY10. Exploration wells in other blocks will be in 2HFY10, with one rig from D6 and one new delivery. Entry in domestic oil retailing is likely to be gradual and at a controlled pace.

Balance sheet — Net debt was Rs280bn. FY10E capex guidance at $4.5-5.0bn incl. RPL’s remaining capex of US$0.5bn (total project cost of US$6.5-7.0bn).

To see full report: RELIANCE INDUSTRIES

>India Equity Strategy (CITI)

4Q09 Earnings Tracker 1: Managing Deflation?

In-line, positive, with a few wide variances — It's still early days in India’s earnings season, but the first trends suggest earnings are in-line with modest expectations – +2.3% vs. 3.3% est. for the Sensex (10/30) and +1.1% vs. -1.9% for the larger CIRA India Universe (34/138 reported). There are a few outliers – banks and Cement on the upside and Ranbaxy on the downside, but trends so far suggest overall earnings growth should largely be on track to reflect our -4% 4Q09yoy growth for the Sensex, and -14% for the wider CIR set.

It's deflation, but corporates appear to be managing it fairly well — It’s a deflationary environment. Sales growth has plummeted to -4%yoy (+38% a year ago) against our +8% expectation, suggesting pricing and demand issues. While this in itself augurs poorly, the corporate sector appears to have adjusted fairly aggressively and well to the changed environment (with a little help from commodity prices, no doubt). EBITDA margins are up a sharp ~130%yoy and qoq, suggesting operational and cost adjustments at aggregate have been fairly sharp. While sales and margin performance allow for divergent interpretation and
extrapolation, we would wait for more results before calling either way.

Broader market appears more robust: A wider sample of 100 companies (BSE500) suggests a more positive bias. Profits are up 6%yoy and 12%qoq while sales growth is flat sequentially. Pertinently, over 2/3Q09, the wider set was consistently weaker than narrow Sensex companies, possibly suggesting greater stress at the top end than the broader market? Let's wait for more of the earnings season.

Sector Leaders and Laggards —Banks (weak asset quality, but better than expectations) and Cement lead. Autos, Utilities and Ranbaxy make up the rear.

To see full report: EQUITY STRATEGY

>Indian Banks (ABN-AMRO)

Sensitivity analysis

We assess that the negative impact of the proposed change in the method of calculating interest payments on savings accounts will be 3-8% of FY11F earnings across our coverage universe, assuming the banks do not pass on the increased cost to customers or alter the deposit rates.

Interest payments on savings accounts to be calculated on a daily basis from 2010: Currently, administered interest payment of 3.5% is calculated on the minimum balance held in the account from the tenth day to the last day of each calendar month. RBI has proposed that the payment of interest on savings bank accounts by scheduled commercial banks (SCBs) be calculated on a daily product basis with effect from 1 April 2010.

Sensitivity suggests negative impact on earnings of 3-8%, actuals may be lower: We estimate the adverse impact from this move will be 3-8% of reported earnings in our
universe. This is assuming the banks do not pass on the increased costs to customers or
realign their deposit rates. We believe banks will most likely reduce the deposit rates on
short-term products to compensate for the higher cost of deposits on savings bank balances.

Impact would be a function of the proportion of savings deposits and return on assets: We believe the impact on a bank’s profitability is a function of the proportion of savings deposits and the return on assets (RoAs). Generally, banks with a higher proportion of savings deposits would be adversely placed relative to peers. However, if the RoAs are high, the overall impact may not be as much.

Key assumptions of our sensitivity analysis
Our calculations assume banks do not pass on the increased cost to borrowers or align their
deposit rates. We assume a flat cost of 3% on savings account balance, while actuals may
vary by +/- 10bp. Also, note that sensitivity is based on FY10F RoAs, whereas the impact of
the development would be on FY11F earnings.

To see full report: INDIAN BANKS

>Neyveli Lignite (KARVY)

Not lignitng enough value

Neyveli Lignite Corporation (NLC) is engaged in power generation (capacity 2,490 MW) with back ward integration of lignite mining. Though, it is adding significant capacity of 1750 MW, existing 600 MW (TPS-I) would be shut down gradually. Further additional 1000 MW capacity (coal based plant in JV) would be margin decretive without having captive mine, unlike existing plants. While, Public Sector Unit (PSU) pay revision to pressurize EBITDA margin in FY09 and FY10, higher interest and depreciation cost would penalize net profit growth. Hence, despite 16% sales CAGR, net profit is estimated to grow only at a CAGR of 9% during FY09-14. Moreover, due to high un-deployed cash we expect ROE ~ 9% in next two years, against achievable 16%. Therefore, we rate it as Underperformer with a price target of Rs 75, based on DCF valuation.

Capacity addition will be margin decretive: Though NLC is adding significant capacity, majority of those would be margin decretive as it would not have captive mine like existing plans. NLC is adding 1,750 MW by FY13; out of which 750MW would be lignite based integrated capacity with captive mines by FY11. However, existing lignite based 600 MW (TPS-I - the oldest power plant of NLC) is planned to shut down gradually by end of FY14 which would trim net addition (integrated units) to 150 MW. It is also adding a 1,000 MW coal based non integrated plant by FY13 where fuel (coal) would be sourced from outside (Orissa, ~1400 Km from Neyveli) unlike existing integrated plants. Hence new 1000 MW, is expected to fetch lower EBITDA margin of ~ 30% compared to ~40% in existing integrated plants. So, we expect most of the new capacities would be margin decretive.

Margin pressure leads to unimpressive earnings growth: We expect EBITDA margin to touch 32% and 36% respectively in FY09 and FY10, against ~40% previously. This is primarily on account of significant hike in staff cost stemmed from PSU pay revision. However, NLC is in the process of applying for tariff revision factoring current pay hike, which should help it to regain ~ 40% of EBITDA margin in FY11 and FY12. Nevertheless, it would not be sustainable; with commencement of coal based non-integrated plant from FY13. Moreover, higher interest and depreciation cost (lead by on going capex) would hinder in net profit growth. Effectively, despite a sales growth of (CAGR FY09-14E) of 16%, net profit to record a CAGR of only 9%.

High cash accumulation in balance sheet, to hurt returns: Though huge cash (Rs 48 bn) reserves of NLC could be seen as positive for a power company, we read it as inability of NLC to leverage the current high growth environment and deploy cash efficiently. We believe it carries opportunity cost as by deploying cash in projects NLC could earn ROE of 16%, much higher than earned by cash in bank. Current trend of net cash being ~20% of capital employed to continue in future, indicating one fifth of capital idle. Effectively it will drag ROE as assured ROE is earned only on core net worth (invested in projects). Hence, against achievable ROE of 14%, NLC has achieved 8-12% in history and expected to earn below 12% in future against achievable 15.5%.

Valuation: We estimate 9% net profit CAGR (FY09-14E) and ROE of ~9-10%, while it is trading at 20x FY10 EPS. Though there are some positives in the stock, we believe those are already factored in the current price. Hence, we initiate coverage on NLC with a target price of Rs 75 (based on DCF) and rate as under performer.

To see full report: NEYVELI LIGNITE

>Wockhardt (AVENDUS)

Cut target price; near‐term events to determine value

Wockhardt’s 2008 results point to large uncertainty over the nearterm. While operational performance has been in‐line with expectations, excessive leverage and undisclosed hedging positions could continue to heavily influence net income. A claim of INR4.9bn on the company on forex contracts adds to the air of uncertainty. We paint two scenarios that could lay ahead for Wockhardt. Assuming the company stays unbroken and functions as a going concern, the strong visibility in operating margins would be rewarded by the market. In our assessment, this could draw a value of INR204/share, to which we assign a probability of 15%. In a second scenario analysis, an assets stripping sale of individual businesses indicates INR87/share, to which we assign a probability of 85%. Combined valuation for the company thus stands at INR104/share. Downgrade to HOLD. Near‐term movement in the stock would be driven by news flow on sale of assets by the company.

Uncertainty clouds thicken over net earnings
Wockhardt is saddled with debt, with 2008 closing at a D:E of over 3.8:1, by our estimates. The high degree of leverage would keep the company’s bottom‐line vulnerable to changes in interest outgo. In 2008, the company’s coverage ratio was a low 2.6x. We believe the number would slip further in 2009. Concern over MTM losses may persist until publication of unabridged annual accounts. A claim on the company for INR4.9bn pertaining to forex losses lies unaccounted. We assign a probability of 50%.

Scenario I: Significant upside if company stays unbroken
Assuming the company stays unbroken, the strong visibility in operating margins would be rewarded by the market. Over the last 16 months, the company has traded at an average 1‐year forward MCap/EBITDA of 2.7x. Doing away with the extreme ends of the valuation range we arrive at a steady‐state mean MCap/EBITDA of 2.5x. The company, in our view, is operationally sound with a steady growth in revenues and healthy operating margins. At 2010 EBITDA of INR9.1bn, we arrive at a per share value of INR204. Assigning a 15%
probability we draw a valuation of INR31/share.

Scenario II: Strip‐down asset valuation at near distress sale
Wockhardt has initiated the process of hiving off parts of its business in a bid to raise its cash coffers. We estimate the cumulative sale values of individual businesses would close at INR46.4bn, about 16% lower than the current EV of the company. Per share value from a strip‐down method thus stands at INR87. We assign an 85% probability, drawing a valuation of INR74/share. Weighted average value of INR104; news flow to drive momentum Our sum‐of‐scenarios valuation stands at INR104/share. Upside risks pertain to higher than estimated proceeds from asset sales and interest waiver benefits from the CDR. Above estimated losses on derivative contracts is the single biggest downside risk to our call. Downgrade to HOLD.

To see full report: WOCKHARDT

>Hero Honda (KR Choksey)


Hero Honda (HH) reported net sales of Rs 3,422.5 crore, up 23% y-o-y & 19% q-o-q. Operating Profits stood at Rs549.1 crore, increased by 33% y-o-y, improved realization along with reduction in commodity prices helped OPM to improve by 127bps. Net profit reported was Rs.402.2 crore, improved by 35% y-o-y and profit margins enhanced by 104 bps y-o-y to 11.8% on account of margin expansion and lower tax.

Higher than expected volumes enhanced the topline: Topline improved
by 23% y-o-y to Rs3,422.5 crore in Q4FY09 on the back of 13% growth in volumes and 9% growth in realisation. Realisation improved by 7% y-o-y due to price hike in earlier this year and better product mix. HH outperformed the two-wheeler industry with a domestic market share of over 57%. HH witnessed a volume growth of 12% in FY09 whereas the industry grew by 5% y-o-y.

Robust operating performance: HH OPM stood at 16.0%, an improvement
of 127 bps y-o-y. The margin was 64 bps higher than our estimates due to higher than expected benefits from the softening in raw material prices. Raw material cost as a percentage of sales declined from 70.2% in Q3 to 68.9% in Q4FY09.

Net Income improved due to tax benefit from the Haridwar plant: Net
profit stood at Rs402.2 crore, a growth of 35% y-o-y. The effective tax rate for the quarter was 28% due to tax benefits enjoyed in the Haridwar plant. Thus sharp growth on the Opearting performance and decline in the tax rate led to the expansion in the NPM by 104 bps y-o-y to 11.8%.


• HH has chalked out Rs.350 crore capacity expansion and modernization plan in FY10 to upgrade plants and to develop two-wheelers engines conforming the emission norms of 2010

• During FY09, the company posted 3.72 million vehicles sales and aims to
reach 4 million mark in FY10. To maximize tax benefit at Haridwar plant HH plans to produce 1.2 million units by FY10

• Commencement of Haridwar plant during the fiscal was another advantage for the company as 100% tax exemption benefit for this plant for 5 years started in this fiscal

To see full report: HERO HONDA


Marico and GSK: The trend setters

Marico and GSK have been the first companies to report March quarter results. We have listed here the key thoughts and trends that emerge for the FMCG sector from these two results.

Topline and volumes robust in March quarter
Sales growth for both Marico and GSK Consumer Healthcare (GSK) remained robust in the March quarter. Volume growth for Marico remained steady (8% growth in Parachute, 5% in Saffola - 3% Y-o-Y growth in the December quarter). For GSK, volume growth was very high at ~20% (out of this ~6% has come from growth in international business and pipeline inventory of new products).

International markets remains a key growth driver
The international sales of Marico and GSK have grown by 35% and 45% Y-o-Y, respectively in the March quarter. In FY10, growth rate, especially for Marico, is however, likely to come down owing to higher base and lower inflation-led growth in some of its markets. Growth in international markets will be a key factor to watch out for even in the case of Godrej Consumer Products (GCPL), Dabur, and Asian Paints.

Innovation pipeline aids volume growth
Both Marico and GSK have benefitted from their new product launches in the recent past. In the past few quarters, Marico launched Saffola Cholesterol Management and Saffola Diabetic, Parachute Advansed (revitalizing hot hair oil), Saffola Zest and Saffola Rice. GSK too introduced three new prodcuts in the past few quarters (Horlicks Nutribar, Dood, Activ Grow). These new product launches are likely to propel incremental sales growth for the company.

Sharp dip in ad rates expand margins
We had predicted in our report ‘FMCG- Sunny days ahead’, dated November 7, 2008, that ad rates will correct in the March quarter and will help FMCG companies increase margins. In line with our estimates, ad revenues of Zee Entertainment Enterprises (ZEEL) were down 7% YoY (against ~30% YoY growth in H1FY09). For Zee News, ad growth came down sharply from ~39% in Q3FY09 to ~24% in Q4FY09 (largely growth was from new channels). Consequently, EBITDA margins were up 330bps Y-o-Y and 40bps Q-o-Q for Marico, and 203bps Y-o-Y and 980bps Q-o-Q for GSK. We expect the pressure on ad rates to continue in H1FY10, and then see the ad rates firming up in H2FY10 if the economy revives. In case of Marico, ad costs (as a percentage of sales) were down 510bps Y-o-Y and 80bps Q-o-Q in the March Quarter. For GSK, they were down 230bps Y-o-Y and 60bps Q-o-Q. However, both companies expect ad costs to be higher by 200bps for FY10/CY09 over the March 2009 quarter, owing to higher ad investments in new products.

Packaging costs – mixed signals
Packaging costs are partly linked to crude prices and account for 10-15% of costs for most FMCG companies. In case of Marico, it was down 140bps Y-o-Y, while for GSK, it was higher 35bps Y-o-Y, largely due to change in packaging and new launches.

Signs of downtrading visible
In Kaya, same store clinic sales (clinics over a year old) have grown 10% Y-o-Y against 13%
in Q3FY09, which clearly shows that discretionary spends are impacted. Sales growth for
Saffola, although up marginally Q-o-Q, is still lower than the growth seen in H1FY09. This is due to downtrading by consumers to low-cost vegetable oils due to high price differential. We expect the same trend for GCPL and Hindustan Unilever (HUL). In fact, GCPL’s soap volumes are likely to grow faster than HUL’s, owing to down-trading in favour of GCPL’s value–formoney (VFM) platform and the successful launch of Godrej No.1 – Strawberry and Walnut.

Volumes likely to remain robust; margins to expand for other companies
We expect volume growth to remain robust (especially for companies which have a strong presence at lower price points) and margins to expand for most FMCG companies (due to a
mix of lower costs of ad, palm oil and packaging materials) in the March quarter.

To see full report: FMCG SECTOR

>Bank Of India (ICICI Direct)

Muted quarter but in line…

Bank of India’s (BOI) Q4FY09 results were in line with our estimates with PAT growth of 7% YoY to Rs 757 crore. Total global business of the bank grew 26% YoY to Rs 334440 crore, contributed by global deposit growth of 26% to Rs 189708 (domestic deposit growth of 27% to Rs 159487 crore) and global advance growth of 26% to Rs 144732 crore (domestic advance growth of 26% to Rs 115354 crore). GNPA rose by 28% YoY to Rs 2471 crore (1.71%) while NNPA was well controlled up 6% to Rs 628 crore (0.4%) with provision coverage slipping by 667 bps to 74.6%.

Highlight of the quarter
Total income grew by 19% YoY to Rs 2219 crore backed by NII growth of 18% to Rs 1433 crore and non interest income by 20% to 785 crore. Operating profit grew by 16% to Rs 1408 crore because of rise in operating expense by 23% to Rs 811 crore. The bank restructured assets worth Rs 5049 crore (1.8% of domestic loan book) during the year.

We have revised estimates for FY10E PAT downwards by 8% on the back of moderation in loan growth with downward bias on NIM’s, moderation in fee income and inch up in slippages. We expect the BOI to register PAT CAGR of 14% over FY09-FY10E. Going forward we believe that asset quality will face pressure and hence we have built in higher provisions for the same. We expect the GNPA to be at 2.2% and 2.3% in FY10E and FY11E respectively. The ability of the bank to generate higher than industry average ROE’s will fetch it premium valuations over its peers and hence we value the bank at 1.1x its FY10E ABV to arrive at a target of Rs. 269.

To see full report: BANK OF INDIA

>Fun with Flows (CITI)

Back To Billion Dollar Inflows To Asian Equity Funds

Asian fund inflows reached US$1bn for the first time in a year — According to EPFR Global, inflows to offshore Asian equity funds carried on and rose to a 50- week high of US$946m in the week ended last Wednesday. The continuous inflows over the past seven weeks have taken YTD net flows to a positive US$1.6bn, compared with net outflows of US$8.1bn during the same period in 2008. From a 4-week average perspective, inflows are now as strong as those experienced in 2006 and 2007 (figure 2) and further upside seems limited.

China, Taiwan & India funds winners of the run of inflows; Singapore the loser While inflows to Korea funds were losing momentum, new money to China, Taiwan and India funds remained strong last week. On the contrary, Singapore country funds saw the most net outflows, not only last week but also last month. YTD this is the lone fund group for which net outflows have been reported. Singapore has been a consensus overweight at Asian funds for quite a while, but the overweight position has been narrowing, from 190bps in December to the current 110bps.

Excess liquidity seeking for high-return asset classes s.a. emerging market equities Not just Asian funds benefited from the significant increase in excess foreign liquidity (we look at the gap between supply and demand of money growth in G7), Global Emerging Market funds also received billions of US dollars of net cash last week. Year-to-date, net inflows to all global emerging market funds have totaled US$9.4bn, contrasting net redemptions of US$5.8bn from International equity funds.

To see full report: FUN WITH FLOWS

>Nymex crude up on shares; cautious econ optimism

Singapore - Crude oil futures rebounded Thursday in Asia on an upside lead from firming equity markets, amid a renewed sense of optimism over the global economic outlook.

However, traders continued to weigh the implications of swine flu as well as weekly U.S. oil data Wednesday, which served as a reminder near-term fundamentals remain weak.

"With the swine flu, I'd imagined the market as a whole would move downward. But FOMC's somewhat optimistic outlook yesterday may be supporting the market," Ryoma Furumi at Newedge Japan said of a relatively positive statement on the economy overnight from the U.S. Federal Reserve.

On the New York Mercantile Exchange, light sweet crude futures for delivery in June traded at $51.52 a barrel at 0652 GMT, up 55 cents in the Globex electronic session.

June Brent crude on London's ICE Futures exchange rose 44 cents to trade at $51.22 a barrel.

Oil prices rebounded Wednesday on the back of buoyant stock markets, despite weak U.S. stockpile data.

The federal Energy Information Administration posted sizable increases in the country's crude and distillate inventories, although gasoline stocks fell on a drop in imports and refinery output.

The demand for motor gasoline rose an anemic 0.2% in the week to April 24 to 9.151 million barrels a day, the EIA said in its Weekly Petroleum Status Report.

"Under normal market conditions, we would be viewing the EIA report as a further reinforcement of our near-term bearish trading ideas. But within the current economic climate, supply/usage balances are being forced to the backburner in favor of a broad-based entry of hedge funds into the equity and commodity markets generally," Jim Ritterbusch, president at trading advisory firm Ritterbusch and Associates, said in a note to clients.

"This dichotomy between bearish fundamentals and bullish financial guidance could easily maintain crude values within a sideways pattern thorough the balance of the spring period."

So far Thursday, Asian equities were steadily higher, with automotive and technology stocks leading in Japan after positive industrial output data and Taiwan shares surging on hopes for improved ties with China.

Dow Jones Industrial Average futures were recently up 45 points.

The Federal Reserve said in a statement Wednesday "the economic outlook has improved modestly since the March meeting," though it could remain weak "for a time."

The dollar weakened to $1.3320 against the euro, from $1.3250 overnight, presenting a small incentive for traders to be long on dollar-denominated commodities.

"There must be sizable position-squaring going on" (in oil), Furumi said of a Singapore public holiday Friday, with Japan having kicked off its own Golden Week break Wednesday.

At 0652 GMT, oil product futures also advanced.

Nymex heating oil for May climbed 59 points higher to 133.50 cents a gallon, while May reformulated gasoline blendstock traded at 145.74 cents, up 90 points.

Both May contracts will expire at Thursday's settlement.

ICE gasoil May changed hands at $430.50 a metric ton, up $3 from Wednesday.


>Spot gold trading lower; equities weigh

London - Spot gold prices traded lower in Europe Thursday weighed by higher equity markets and weak demand for the precious metal, and analysts said both indicate prices could trade lower in the weeks ahead.

European stocks opened higher Thursday due to increased risk appetite after the U.S. Federal Reserve's upbeat outlook on the economy Wednesday boosted investor confidence.

At 0942 GMT spot gold was trading at $888.60 a troy ounce, down 1% from Wednesday's close. Spot silver was at $12.59/oz, down 1.3%. Spot platinum was at $1,104.50/oz, up 0.9%. Spot palladium was at $218.50/oz, unchanged from the close.

"Investors are becoming more confident that we will have a recovery this year and that is weighing on gold," said Commerzbank analyst Eugen Weinberg.

Weinberg said gold prices could trade down to $800/oz in the summer before trading back above $1,000/oz next year when inflation could again be in focus.

For now, jewelry demand remains weak and investor exchange traded fund buying is stagnating, Weinberg said.

Daily data from the SPDR Gold Trust fund, the largest gold exchange-traded fund, showed gold holdings were unchanged for a fourth day at 1,104.45 metric tons, despite this week's drop in prices.

"The only reason for the rise in the last month was investor demand," Weinberg said.

Gold prices have been range trading but technical indicators suggest the precious metal will have a "breakout," said FuturesTechs analysts.

Volatility is contracting significantly and "this usually happens ahead of a breakout - like pressure building up on a Champagne Cork," FuturesTechs said.

In other news, Japan's auto production in March fell by 50%, making it the sixth straight month of declines. The auto industry is a key consumer of platinum and palladium for use in catalytic converters.