The Hindu Business Line : Gold may lose sheen on rising dollar, rate fears

COMMODITIES, in general, and gold, in particular, benefited from a combination of factors including low interest rates, money supply growth and a weak dollar. The good times could be coming to an end.

Gold prices could be headed lower if both fundamental and technical analyses are any indication. After April 1 when gold touched the recent peak of $430.40 an ounce, there has been a marked retracement and prices are now precariously poised around $385/oz. There are a number of negative developments within the gold market that suggest a fall in price, according to experts. Physical demand remains weak with price sensitive markets like India waiting for prices to fall further, while the western markets continue to suffer from a downturn in interest in yellow gold jewellery. The role of central banks is to be reckoned with. It is clear that France would most likely join Germany as a major seller under the next European Central Bank Gold Agreement. There are indications that Italy also might join. While how much gold will be sold is as yet not known, the intention to sell is clear.

The pace of producer de-hedging is now slowing down. There are signs of hedging from smaller companies in an effort to finance a raft of new projects and expansions. For new projects, financiers will require promoters to adopt risk management.

According to Mr Kamal Naqvi, precious metals analyst with Barclays Capital, the end of the `reflation trade' has greatly affected gold where the dominance of speculators has completely overshadowed weak physical demand. "Indeed, gold prices would have fallen further had it not been for the current level of geo-political concern and the high, rising, price of crude oil. However, the speculators who remain long are now looking to sell into price strength and we see current support above $380/oz as extremely vulnerable," the expert commented.

The technical view also seems to point to an end of the road for the yellow metal. April was an important month for gold. With a higher high, a lower low and a close below the low in March, it was "key month reversal," according to Mr Phil Roberts, technical analyst who added, "In candlestick terminology, April was a `bearish engulfing' month. Both of these are major trend extending formations".

Suggesting that the long-term uptrend was losing momentum, the analyst pointed out that during the collapse from $431, gold fell and closed not only below trendline support, but also below its 100 and 200 day moving averages. All of these are said to represent compelling evidence that the four and a half year uptrend is over and a deep correction has begun. "The technical picture is unambiguous: sell rallies," is Mr Roberts' advise.