The Hindu Business Line : Impact of non-fundamental factors may continue in gold

Mumbai March 25 Gold continued its interesting gyrations last week. Despite a stronger dollar, gold was buoyed by much firmer oil prices and market sentiment. Thursday last, the yellow metal rose to a 3-week high before easing to close at $663.30 an ounce.

On Friday, however, in line with other metals, gold fell following relatively softer oil prices and the dollar continuing to strengthen modestly.

Volume Concern

The London PM fix was $656.25/oz, down from the previous day's $663/oz.

From a technical perspective, analysts note that the declining volume throughout the rally from the early March lows remains a concern, but not enough to turn to a bearish view on the market.

Instead, they are looking for signs of increasing volume to turn more confidently to the topside.

While prices remain above $657-659/oz, gold is likely to head to the $670/oz area if not potentially higher in the near-term, according to experts. Going forward, the yellow metal will continue to be impacted more by non-fundamental factors.

In other words, despite gold's fundamental balance improving, it is unlikely to be a main influence in driving current price levels higher.

Instead, the future path of the dollar, oil prices and geo political developments are likely to remain key in the gold market over the next few months.

The market is likely to remain choppy. Rising prices will often result in to profit taking and long liquidation, resulting in correction.

Crude

The market is getting ready for the summer driving season in the US. With the US gasoline market tightening and prices firming up, refiners are sure to commence inventory building.

The `crack spread' — profit margin from turning crude into gasoline and heating oil — is currently trading at highs not seen since September 2005 when Katrina and Rita ripped through the Gulf. There is a strong expectation that demand for crude from profit seeking refiners will drastically pick up.

Base metals

Last Wednesday's dovish Fed comments, overall supportive Chinese metals trade data and recent trend of LME stock drawdowns have combined to impart an upward thrust to the base and industrial metals markets. Better-than-expected US existing home sales data (showed sales were 3.9 per cent higher in February, their third consecutive monthly rise) to 6.69 million units (annual rate) was supportive of base metals. Copper prices gained by slightly less than 2 per cent last week, underpinned by over 10,200 tonnes decline in LME stocks.

On Friday, LME cash was at $6,787 a tonne and LME 3-month $ 6,720/t. LME stocks continued their decline for 10 days in a row. The recent rally in copper prices has been on the back of short-covering activity, although last Thursday's data showed a rise in open interest, something that suggests fresh buying.

For copper prices it would be crucial whether a more consistent follow through buying that reflects a bullish sentiment materialises. Chartists have cautioned against a near-term bullish view on copper. The market was unable to hold above the $6,800 hurdle (50 per cent retracement of the May 2006/Febraury 2007 decline) and closed lower.

Momentum is at overbought levels that have led to price pullbacks over the last nine months. However, a significant support area is at the recent breakout level of 6,375/6,410. In the absence of a break below this level, a pullback may be viewed as a pause in an ongoing recovery. A move above 6,800 would point to 7,100 into the next quarter, analysts asserted.

Tin

Tin prices have been buoyant, reaching a multi-year high of $14,300/t. Prices continue to gain support on the back of supply side uncertainties from Indonesia's Bangka Island, while the recent trend of stock outflows highlights market tightness. LME tin stocks have been falling and are close to the lowest levels since November 2005.

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