The Hindu Business Line : Gold may rebound in the near term

Chennai May 27 Gold is still in the grips of the bears though a rebound to the upside is possible in the near term, according to an outlook for the metal for June.

Giving hope for a rebound is the possibility of the dollar weakening and gold tracking it.

HOUSING MARKETS

According to Kotak Commodity Services Ltd, the US economic outlook still looks weak and the housing markets remain the key area of concern. "Housing markets will keep the dollar weakness in tact in the near term. Current figures from the housing markets suggest weaker housing starts going forward," said Kotak in its outlook.

The dollar declined against the euro to 1.3447 during the weekend on reports that housing purchases in the US were the lowest in four years.

Higher crude oil prices are also expected to support gold prices. Crude oil prices are ruling firm with fundamentals supporting the firmness. Sell-off in the market has not affected the prices in view of the strong fundamentals. "The prices are expected to remain strong going forward on back of various factors supporting the prices," the outlook said.

WTI crude closed at $64.97 a barrel during the weekend, while Brent finished at $70.60 a barrel.

STRUCTURAL DIFFERENCE

Larger demand sentiment in the markets is supported by lower production levels from OPEC (Organisation of Petroleum Exporting Countries) and crude oil markets are witnessing another structural difference where Brent is trading at a premium to WTI (West Texas Intermediate). "We expect the difference to lower and support WTI price in the near term where prices are expected to strengthen. This would keep gold prices also supported as an inflation hedge," it said.

Other factors seen supporting crude prices are: The upcoming US driving season demand, demand from China, supply cuts by OPEC and falling distillate and motor fuel stocks.

DROP IN OUTPUT

Meanwhile, production in the major four producing nations has been declining during the last five years. Production in South Africa was the lowest in 84 years last year, while Australia slipped to the third place in production from second due to fall in production. Its estimated production of 249 tonnes was the lowest in 13 years.

Production in China has, however, increased due to better policy measures. But the increase is unlikely to fill the gap created by the fall in mine production in South Africa, the US and Canada.

"The hike in gold prices has supported production facilities in major producing countries. The mines, which are facing serious cost problems in South Africa and other countries, will be hit in case gold prices tumble and reduced supply will support upward movement, the outlook said. The strengthening of the rupee has spoilt gold's run to an extent. However, the rupee's bull run is unsustainable in the long term since its strength came when trade balance was worsening.

Exports are the key driver of rupee's strength but capital flows, coupled with foreign direct investment and initial public offers, into the country will dictate the currency movement and most probably, will make it trade strongly. That, in a way, could keep gold prices on leash.

STRONG DEMAND

Investment and jewellery demand for gold is still at higher levels and low prices could see a rise in the offtake. Jewellery demand in India could rise significantly if prices remain below Rs 9,000 levels for 10 gm. Investment demand has also been strong, although holdings of gold exchange-trade funds (ETFs) have declined in the last few weeks.

Still, the gold ETFs are expected to support prices and emergence of a number of ETFs is expected to create incremental demand for gold by 90-100 tonnes.

Also, lower prices could force buyers to advance their purchases for the wedding season ahead. Long-term buyers are also likely to invest more in the market.

TECHNICAL PICTURE

According to Kotak Commodities, correction in gold prices was coupled with fall in open interest positions, which mean long liquidation sweeping the markets.

Crucial support for gold on COMEX stands at $654 an ounce and support below this will be at $642. To rise to $665 and $669, it will have close above $663 and it will have to attain $699 to reach levels of $712 and $720.

Gold during the weekend was quoted at $654.90 an ounce.

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