The Hindu Business Line : Gold faces resistance on profit-booking

What's in store
Near-term sticking point for gold could be between $690.33 and $693.77.
Platinum, palladium prices seen following gold's track.
Copper may retest 2006 peak of $8,800 in medium term

Mumbai May 6 Despite firmer dollar following US data releases and easing oil prices, gold showed a positive price performance towards the latter part of last week.

On Friday, London PM Fix was $680.80 a troy ounce, up from the previous day's PM Fix of $674.20/oz. Silver, too, was up on Friday to $13.40/oz ($13.33/oz).

Profit-taking

The gold market has been trying to push higher; but as is its wont, there is profit taking at every steep increase in price. No wonder, despite threatening, the metal has failed to decisively break the $700/oz barrier for quite some time.

While the market participants will continue to closely track dollar movements, economic data and geopolitical developments, some new factors could come into play. Threat of strike by Peruvian miners is one. If the strike materialises, it has the potential to disrupt supplies.

At the same time, price conscious markets such as India will continue to face a significant demand growth slowdown or even demand compression at the current high price levels.

Strengthening rupee vis-a-vis the dollar has of course helped in recent weeks; but demand growth can come only from consumer-friendly prices.

Monsoon and agricultural production prospects will also play a major part in fuelling demand.

Sticking Point

According to technical analysts, gold will push critical resistance, even as the market continues to push higher, reaching the confluence of resistance between $690.33 and $693.77 which should prove to be a near-term sticking point.

However, with daily momentum not yet at levels consistent with previous highs, and the ongoing pattern of higher highs and lows, odds suggest that this level will give way, chartists assert, adding that this is particularly significant as closes through here set the market in motion for further gains to $700 and above.

However, back below $667.65, there is the risk of a greater-than-anticipated correction.

Silver signs

Silver too is throwing out basing signs, but above resistance at $13.60 is needed to confirm a strong bottom is in place.

Platinum and palladium prices are also seen following the track of gold, with strike at a mine leading to production losses, albeit on a small scale.

However, in a tightly balanced market, supply disruptions leave prices high vulnerable and susceptible to upside risk. Base metals had a remarkably strong week with prices moving up again on Friday. Stronger-than-expected economic data and another drawdown of stocks for most metals provided the complex with the momentum to build on previous day's gains.

Chinese Exports

Zinc jumped by 14.3 per cent during the week to $ 4,188 a tonne driven by new longs after signs of improvement in physical demand and growing belief that Chinese exports could slow after the first-quarter surge.

Sustained drawdowns of LME zinc stocks and minimal deliveries into the system, despite higher output, have compounded fears the market is tightening further.

Copper and nickel rose by 7.4 per cent and 6.5 per cent respectively during the week on the back of apparent short-covering. Copper rallied to $8,180 a tonne on Thursday, setting a fresh 10-month high.

Despite profit-taking at the high level, prices closed the day's high. LME inventories have been declining for 14 days in succession so far.

Pullback likely

Technical analysts said in the short-term, after copper broke through the July/September 2006 highs (resulting in levels not seen since May 2006) there is little to stand in the way of further upside and a run at the all-time peak of $8810; but caution that from these levels there would be stronger pull back than seen previously.

The strength of the all-time high and the completing Elliot wave count are compelling, they assert. In the medium-term, the market will ultimately retest and likely exceed its 2006 peak near $8800.

Analysts see the outlook for aluminium developing increasingly bullish. The metal has been a noticeable laggard during the most recent base metals advance as the price action has been confined to a choppy $2550/2900 area range trade. Initial upside targets are seen to the $2932 highs, through which open $2965.