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Wednesday, Jul 10, 2002

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Gold expected to get support from equities

G. Chandrashekhar

MUMBAI, July 9

GOLD prices have traditionally had a close relationship with the dollar and the US equities. Specifically, the dollar has been a key driver for gold prices. But the behaviour of the two so-called `fool-proof' trading tools for gold in recent times has been a cause for concern.

A look at movements in the dollar and the equities markets on the one hand and gold market on the other since May shows that gold has dislocated from the dollar and dislocated even more from the US equities.

Over the past six months, the relationship between dollar and gold has become less clear-cut with gold prices running ahead of dollar depreciation in late-May and then dislocating completely in the final week of June.

Movements in recent weeks suggest that the US equities and dollar will remain tied together. There is expectation that the US equities markets will remain under pressure, so will the dollar, although no one is expecting a massive fall in the latter from the current levels.

If gold stands dislocated from the equities and dollar markets, where will support come from? According to Mr Kamal Naqvi, analyst with Macquarie Research Equities, support for gold may once again come from renewed interest in gold equities over the coming weeks.

Pointing out that while gold equities have fallen sharply from their peak since the end of May, gold price is down by a very modest 5 per cent since its brief attempt to break above $330 an ounce on June 4, the analyst said after running strongly this year, arguably too far ahead of the gold price, many gold equities have now returned towards "fair value''.

"Should we see further weakness in `traditional' equity market sectors then there is clear potential for a resurgence of buying interest in gold equities,'' Mr Naqvi said.

Describing the relationship between gold prices and gold equities as incestuous, the bullion expert said movements in the gold price were generally the catalyst for buying interest of gold equities, while movements in the gold equity indices were often used by gold traders as a trading tool for their gold positions.

As a result, movements in gold equities and the gold price can provide a momentum of their own, albeit normally relatively short-lived, he added.

The recent weakness in gold prices should be seen as a needed correction and one can expect further gains in gold equities and gold prices in the coming weeks, largely on the basis of a continued downward trend in global equity markets, Mr. Naqvi reasoned.

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