The Hindu Business Line : Gold may be range-bound

Last week, gold lost the positive momentum it had garnered earlier and came under pressure in the general commodity sell-off. The metal once again traded on the back of external factors with dollar and oil price movements providing most market direction.

External Factors

A combination of steep decline in oil prices and slightly firmer dollar seem to have weighed on the sentiment. The London PM fix was $620.50 an ounce on Friday, while in New York, gold rebounded to $622/oz.

With Thanksgiving holiday looming large and little economic data, the metal is well placed to continue to drift along its recent ranges. Experts asserted that oil price movements are likely to prove to be an important factor in setting direction over the sessions ahead.

Foreign exchange strategists are of the view that the trend of strong correlation between oil and the euro/dollar witnessed over the past year is continuing to hold true.

This in turn points to renewed dollar weakness, should oil prices rebound from their recent lows, possibly providing some support to gold especially considering the lack of independent momentum in the gold market at present.

Dehedging

Reports suggest that there will be a further 2.4 million ounces (76 tonnes) dehedging in the fourth quarter, which would bring the total dehedging for the year to nearly 15 Moz (460 tonnes), the largest annual level of hedging since the cycle began in 2000.

Dehedging is expected to continue, but not at the same rates seen in the first half of this year and back in 2004.

This could prove to be modest positive for the yellow metal. The possibility of China's currency diversification continues to loom large.

Base metals

Contrary to expectation, on copper, the bellwether of the base metals complex, the sentiment is turning more bearish. On LME, the metal closed at a recent low of $6,765 a tonne (cash) while 3-month was $6,800 per tonne. Amid the sell-of last week, a major concern for the entire base metals market is whether a falling copper price would mean that the whole metals complex must sell-off.

While, more often than not, prices move together, individual metals would generally trade on their own fundamentals. In such a market, even if shortage develops in one commodity, its price would rise, leaving others vulnerable to downward pressure.

Without doubt, supply uncertainties continue to dog the base metals market. Low-level of inventories too supports firm prices.

At the moment, however, it appears that copper has moved into a small surplus and the situation may continue into 2007.

The impact is already captured in falling prices.

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