The Hindu Business Line : Short-term weakness seen in gold

Prospects
In the medium term, there are still higher highs to come for gold.
Break below $660 has bearish implications for gold.
It may be risky to get too bearish on copper.

Mumbai May 20 Despite the overall or broader bullish picture, gold has gone through a near-term correction. On Thursday last, the metal fell to a 2-month low of $653/oz in intra-day trade. Prices came under intense downward pressure last week by a combination of factors. Mainly, firming dollar against the euro provided the trigger. Even firming oil prices did not exert any positive influence on the yellow metal.

ETF redemption

The expectation of US trade deficit narrowing because of encouraging exports from the US as a result of greenback's continued weakness in recent times imparted strength to the currency. Redemption from the gold ETF (StreetTracks) towards the latter part of the week also added to the downward pressure on gold prices.

London PM Fix on Friday was $ 657 an ounce, little changed form the previous day's $656.75/oz. Silver AM Fix was $ 12.87/oz ($ 12.90/oz).

Interestingly, with the price fall is seen the return of physical buying interest in the market. However, even as the market moves higher from the current levels, there would always be long liquidation and profit taking with every sharp rise. Crossing the psychological $700/oz mark is not going to be easy or smooth, with several corrections likely to come in the way.

`Buy on dips'

Some experts believe that the price blip will be short term and the metal will soon commence its northward journey. In the event, buying on dips is advisable. There is also expectation that inflows into ETFs will pick up in the months ahead when prices head higher. The global hedge book position too suggests producers' are positive on gold prices.

According to technical analysts, for the short term, the break below $660 has bearish implications. Over the next few days, one could look to sell rallies towards $665/670 targeting $648 (50 per cent retracement of the January to April rally this year).

In the medium term, however, there are still higher highs to come for gold.

Choppy range may give way to the topside in the months ahead; above $695 targets $730.

Bearish pressure

For silver, the technical outlook is slightly bearish. The market broke below a multi-month trendline on Thursday last. Although capped by 13.17/29, bearish pressure remains.

The base metals market, too, witnessed a selective sell-off last week. Many have been wondering if we are witness to the replay of what happened exactly a year ago - May 2006 when there was a global meltdown of the markets.

Supportive fundamentals

However, the current fundamentals appear to be fairly supportive of firm prices.

There was significant correction in copper and zinc prices, with falls of 7.8 percent and 8.5 per cent respectively. Nickel actually finished up on the week, while lead, tin and aluminium were largely unscathed. The LME base metals index fell 4.5 per cent on the week as of Friday's close was 7.8 per cent off its high of May 4.

The price falls reflected in part genuine concerns about weakening fundamentals in copper following the rise in Chinese copper imports. During the first four months of the year. Chinese copper may have some further short-term downside.

A rise of 14,287 tonnes in Shanghai copper stocks confirmed suspicion that the Chinese market is now a little over-supplied in the short run. The rise in Shanghai copper stocks since February (up by 75,558 tonnes) and the movement of Shanghai prices to a discount to LME prices suggests some further import weakness, commented an expert.

However, notwithstanding this, it may be risky to get too bearish on copper.

The market is still a well-balanced one, although stocks may rise a little in the short run. The concentrate squeeze looks set to intensify and a second half rally in US demand may well take some by surprise.

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