The Hindu Business Line : Gold: Sideways trading seen in short-term

Metals movement
For gold, the potential for a decisive price movement upwards is dependent on oil prices and further dollar weakness.
For base metals sector, a general positive sentiment is clearly evident.

Mumbai , Oct. 22

A positive sentiment in the crude oil market, sharp decline in the dollar and strong investor interest resulted in gold retesting the $600 an ounce mark towards the latter part of last week. Prices appear to be gaining support around the relatively higher recent levels of between $590 and $600/oz.

Where will the metal go from here?

The potential for a decisive price movement upwards is dependent on the extent and pace of recovery in oil prices as well as on further dollar weakness. The OPEC has decided to cut output from the current levels.

According to a forex strategist, on Thursday, for the first time in several weeks a large dollar move occurred independently of yield moves which suggests that it was probably driven by short-term USD longs being unwound or stopped out.

Strong Resistance

Technical analysts note that with strong resistance lying in the $607/608 area, a close above this level would be necessary to trigger a significant move higher. Should gold breach $608/oz, then the market could go move higher by anything between $15 and $20 an ounce. On Friday, gold closed at $596/oz on the LME cash.

It is most likely that gold might see further sideways trading in the short-term. The dynamics under way in the oil and Euro/USD market could take time before fully exerting their influence on prices. To be sure, there is further upside in both factors, which in turn should benefit the yellow metal.

Crude

The OPEC conference on Thursday decided on 1.2 million barrels a day (mbd) cut from current output levels, with the aim of restricting OPEC-10 output to 26.3 mbd from start of November. The market is convinced that the strong and precise message was intended to largely demonstrate that producers want a floor firmly placed under prices.

That, however, does not mean that the market is not vulnerable to further speculative attacks to the downside; but such an attack appears distinctly unsustainable given the market fundamentals and the aggressive intent of producer to defend current price levels. The OPEC communiqué stated: "Heads of delegation noted with concern that crude oil supplies are well in excess of actual demand, as the above-average level of crude oil stocks in OECD countries demonstrates, and that the over-supply situation and imbalance in demand/supply fundamentals have destabilised the market." "In short, what it means is that Saudi Arabia is very willing to defend prices at current levels, precisely as they had clearly signalled at the previous OPEC meeting," observed a market analyst.

Industrial Metals

A general positive sentiment towards the base metals sector is clearly evident. Volatility in many base metals in general and tin in particular is likely to persist in the weeks ahead. On Friday, notably, the rise in tin prices (2.6 per cent) came on the back of a very volatile week which saw the metal hit fresh high on Monday before falling back sharply through the rest of the week.

Buying interest in aluminium remains strong; but copper market has remained subdued. Zinc is firming up underpinned by tight underlying supply and demand conditions as also concerns over inventory availability. LME reported further drawdown of zinc stocks, leaving total stocks at 122,400 tonnes. A deceleration in China's growth in Q3 as compared with Q2 is believed not to be cause for great concern and that the economy was returning to trend growth.