The Hindu Business Line : Crash in gold prices provides buying opportunity

Prospects
Key downside support for gold is seen at $653.
The yellow metal's price action is in a period of range trading.
Deep correction was inevitable in the vegoil market.

Mumbai June 10 The risks associated with trading in a market where commodity price behaviour is based not on fundamental factors of demand and supply but on extraneous or non-fundamental factors were once again brought to the fore last week.

Funds diversion

Gold prices crashed in response to a firming dollar. The currency strengthened significantly against the Euro. The US Treasury yields rose and the equity market dipped. Readily, speculators began to pull out funds for diversion to other more lucrative markets. The yellow metals' price decline on Thursday was extended on Friday when there was a sell-off across financial markets.

In London, Thursday's PM Fix was $668.75 an ounce and New York close was $659.50/oz. On Friday the PM Fix was lower at $655.25/oz. Silver too declined from $13.65/oz to $13.31/oz (Friday AM Fix London).

Dollar weakness

The greenback has begun to derive strength based on clear signs of narrowing US trade deficit. Dollar weakness of recent times has reportedly improved the competitiveness of US exports even as booming Asian economies continue to be the destination for American exports.

Indeed, what is interesting about the gold market is that the crash occurred despite positive fundamental news including firmer oil prices.

As the market increasingly trades on technicals, there is the possibility of further downside correction if key technical support levels are breached.

Buying Opportunity

The current price level and every dip from here should be seen as a buying opportunity.

After all, the potential for a dollar weakness, oil price strength and geopolitical factors cannot be wished away. These would pull the yellow metal out of its current weakness.

These factors would of course continue to influence investor decision. But how they will pan out or what will provide the trigger is something that needs to be closely watched.

According to technical analysts, following Wednesday's slip below the 10-month trendline, weakness has accelerated, highlighting the evidence that price action is in a period of range trading. Key downside support is seen at $653. Closes back through $674/675 would re-ignite the bullish potential, opening a run towards the $693 area resistance, an analyst asserted.

Base metals: Copper, aluminium and nickel prices all came under further downward pressure on Friday, with investors concerned about rising US bond yields and with expectations of rising global interest rates weighing on the sentiment.

Nickel prices slipped only slightly, but were down by over 10 per cent on the week after Thursday's collapse. LME's tighter lending guidance clearly contributed to the weakness in cash prices, commented an analyst.

Copper prices, too, remained subdued. The inventory trend continues to look positive, but overall sentiment is dampened by a domestic oversupply in the Chinese copper markets and broader macro concerns on inflation and monetary policy tightening, commented an expert.

Justified concerns

While concerns of a copper market oversupply in China are justified, China's copper demand has followed a rather volatile trajectory, and the current oversupply should not be overstressed, he cautioned.

Vegetable oil: Speculative funds take commodity markets on a roller coaster rise. After taking it to dizzy heights they quickly pull out of the market when it is perceived as overheated. Vegetable oil is one of the markets that suffered from the funds pullout.

The crash in vegetable oil market (both palm oil and soyabean oil on Friday) is case in point. Although tightness in supplies caused by large demand from the bio-diesel sector continued to push prices higher, the bull run (prices going up by 30-40 per cent in less than four months) was not at all justified by the fundamentals.

Weather-driven

Clearly, the price levels seen until early last week were unsustainable and a deep correction was inevitable.

It must also be conceded that market direction during June-August is dictated by weather conditions across major origins.

It is clearly a weather-driven market. Crop prospects can undergo changes rapidly.

Therefore, it cannot be asserted that the rally has come to an end.

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