The Hindu Business Line : Metals market: Inflation vs growth dilemma

Indicators
Stronger than expected US economic growth expected to persist into the H2.
Dollar can possibly weaken later this year.
Gold's upward path likely to be slower and less monotonous.

Mumbai , June 25

Notwithstanding recent price recovery, the entire metals complex is expected to remain volatile over the coming weeks, thanks to concern over tightening liquidity that continues to feature in the background. Most market-men believe the Fed could decide on a further rate hike this week. This will slow the dollar depreciation against European currencies for the time being.

DIFFICULT CHOICE

An upward revision of US rates means a less positive macro environment for base and precious metals prices. However, the policymakers will have to choose between inflation control and growth. Stronger than expected US economic growth is expected to persist into the second half of 2006, keeping the Fed's concerns resource utilisation and inflationary pressures elevated.

OVERALL POSITIVE

When the Fed tightening cycle will end is tough to say; but once the market is able to see through the final phase of this Fed tightening cycle, the dollar would begin to weaken. This can possibly happen later this year.

If one went by this argument, the overall outlook for gold looks positive. However, the upward path is likely to be slower and less monotonous than what was witnessed earlier in the year.

So, Euro/USD will be a key factor for the yellow metal in the coming months.

"The correction in gold in recent months has occurred alongside a more hawkish rhetoric adopted by the Fed and an accompanying shift down in market inflation expectations", commented an analyst.

The platinum group metals generally tend to move together with gold.

Their impact from further Fed rate hikes is likely to more focused on the growth component of the equation, rather than on inflation.

Demand for platinum and palladium is likely to remain strong for the rest of the year.

FUNDAMENTALS

As far as base metals are concerned, the supply demand fundamentals remain positive. However, price direction continues to be driven more by macro-economic issues and concerns on monetary policy tightening.

Copper prices have been volatile of late. The market reported drawdowns in stocks from some warehouses.

Technical analysts suggest that the only certainty in the metals market over the coming weeks is that trading conditions are going to remain volatile.

After the rally of the last 12 months investors now seem to be still queuing up to lock-in profits.

Attention could now be switching to the downside.