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G. Chandrashekhar

Rising inflationary fears negatively impacting gold

Mumbai , June 20

Precious metals have come under heavy downward pressure with recent losses aggravated by the large speculative length in the market. Gold prices were further pared down on Monday while trading at around $570 an ounce.

According to Barclays Capital, rising inflationary fears are - perhaps counter-intuitively - negatively impacting gold, traditionally seen as a tactical hedge against inflation.

MOMENTUM STALLED

Investors continue to remain focused on prospects of further Fed rate hikes and broad-based risk reduction.

Clearly, the momentum appears to have stalled and the sentiment is fragile as far as the precious metals complex is concerned, especially gold.

Therefore, near-term risks are skewed to the downside, Barclays said, adding that within this sector, outlook for platinum was positive because of constructive fundamentals while a big rise in gross short positions has increased the risk of a short-covering rally.

In base metals, tight fundamentals continue to be a key feature of the market.

CONCERNS

However, concerns on monetary policy and inflation have resulted in steep corrections and volatile price moves witnessed over the last few weeks. For copper and zinc, the price prospects are seen as positive.

With a potentially less constrained supply side, aluminium may continue to move higher in a more measured fashion, while lead should stay sidelined, partly owing to robust export levels of refined lead from China, Barclays said.

It added that nickel has solid fundamental support from a strong buying appetite from the stainless steel sector and associated sharp inventory drawdown on the LME.

FUNDAMENTALS

In the energy market, crude prices have remained stable and range-bound.

However, looking at the market fundamentals - tightening supplies on the back of robust demand growth and limited non-OPEC supply additions - the price risk is seen gathering to the upside.

In addition, it may be necessary to note that although total net length in the crude oil market remains positive, it has been substantially reduced in recent weeks, diminishing the scope for further liquidation.

On the agricultural commodities front, CBoT corn (maize) pries have a strong upside bias on account of strong US ethanol demand, robust Chinese corn demand, and a projected decline for US corn output in 2006.

Similarly, the outlook for cotton prices on NYBoT is positive because of strong Chinese import demand to meet its textile industry needs.

Although sugar prices on NYBoT have recently weakened from their peaks witnessed earlier this year, the market fundamentals have so far remained positive. There is strong demand for sugar and there is exposure to energy via ethanol.

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