The Hindu Business Line : Currency movement seen impacting gold

Market prospects
Long-term forecasts still see dollar weakness for the latter half of the year.
The yellow metal is moving from a bearish near-term stance to a neutral one.

Mumbai , Jan.14

Contrary to general expectation and in a dramatic move, despite firming dollar and falling crude prices (fell below $52 a barrel), gold staged a strong move higher towards the end of last week, trading above $620 an ounce.

Forecasts

Prospects for the yellow metal are buoyed by the forecasts of dollar weakness and oil price strength. The dollar is now the major driver of gold prices. The market is going to be significantly impacted by the strong relationship between gold prices and Euro/USD.

Analysis showed that the one-month rolling correlation between gold and oil averaged 23 per cent in 2006, whereas the one-month rolling correlation between gold and oil averaged 42 per cent. The relationship with oil dominated gold for the most of 2006, with the correlation in October as high as 70 per cent, while the correlation with the dollar was negative, according to analysts.

Set to reverse

"But the trend looks set to reverse with the correlation between gold and the dollar at the start of this year rising above 70 per cent and the correlation between gold and oil falling to approximately 14 per cent", an expert asserted adding that in the last quarter of last year, the dollar weakened against the Euro and historically the correlation has had a tendency to respond asymmetrically in favour of dollar weakness over dollar strength.

Many foreign exchange experts have revised their short-term forecasts and Euro/USD is currently placed at 1.27. But the long-term forecasts still see dollar weakness for the latter half of the year.

Overall, therefore, with the dollar correlation strengthening and the bias towards dollar weakness, the support for gold throughout 2007 is highly plausible.

Supportive momentum

According to technical analysts, the market has pushed above the old breakdown level near $620 and daily momentum is supportive. It is highly likely that the market is moving from a bearish near-term stance to a neutral one.

The bulls have to eclipse $642 and then $650 to open up the upside in a stronger way, while support on pullbacks is near $616/615.

In the medium term, however, there are still higher highs to come. Choppy ranges will give way to the topside in the months ahead.

Crude under pressure

Oil prices remain under pressure. The crude market reached 19-month lows towards the weekend, prompted by heavy selling. A weak technical picture combined with broad negative sentiment might prompt further technical selling in the session ahead.

On a pure fundamental basis, the correction looks overdone and the crude side of the market in particular looks set to be tightening, analysts asserted adding that crude inventories in the US are falling fast, while the effect of OPEC's cuts implemented in November has only just started to be felt in the major consuming regions.

As the OPEC basket price now below $ 50 a barrel, there is a growing chance that the producers will react to the price slide by being more vigilant on cuts already agreed and possibly by announcing further output reductions.

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