The Hindu Business Line : Gold prices may take cue from global currencies

Positive performance
Market participants are keenly watching the likely course of Fed policy.
In the medium-term, gold prices should resume their upward trend buoyed by the forecast for dollar weakness.

Mumbai June 17 Gold market continues to move amid uncertain sentiment. Prices continue to take their direction from Euro/USD. Last week, prices were resilient despite the bearish announcement from Swiss national bank that it would sell 250 tonnes under the current European Central Bank agreement.

Inflationary Pressures

On Friday, the yellow metal continued its positive performance from the previous day. It gained $4/oz as a slight depreciation of the US dollar and higher oil prices pushed gold moderately higher. In London, the cash price was $653.10/oz. US data releases are keenly awaited.

Market participants are reportedly paying microscopic attention (as one expert pointed out) to the likely course of Fed policy. With so much anxiety, markets are likely to react, or perhaps over-react, to any news it may contain. Forex strategists contend that over the coming months strong growth is likely to translate to increased inflationary pressures more quickly than the market currently thinks; and therefore, think a `stronger-than-expected CPI inflation number for May will have a larger impact on the market than an in-line or weaker print'.

One of the main currencies to be affected is the US dollar, which is likely to appreciate in the short-term. Over the medium-term, though, higher inflation and slowing trend growth would be negative for the currency. Gold prices are thus likely to come under pressure in the near term. In the medium-term, gold prices should resume their upward trend buoyed by the forecast for dollar weakness.

The market sentiment is likely to remain as the key price-determining factor, asserted an analyst. Therefore, on current reckoning, it may be advisable to buy on dips, as the medium-term prospects of a price rise appear good. In the Indian market gold is now selling below Rs 9,000 per 10 grams, a substantial fall in the wake of the stronger rupee. However, further upside for the rupee is rather limited.

Therefore, higher international prices will be reflected in higher domestic prices unlike what happened over last three months. Progress of Indian Southwest monsoon and crop prospects will be keenly watched. There usually is ebb in demand during the rainy season.

Production Growth

Retail purchases will resume during the festival season and at harvest.

Base metals: Last week, most base metals rose over the week as a result of higher global equity prices and news of accelerating Chinese industrial production growth.

Copper rebounded by 3.9 per cent over the week to $7,582 per tonne, while lead rose by a further 4.9 per cent over the week to a new record high, following a 3,550 tonnes decline in LME lead stocks over the period. Nickel bounced on Thursday and Friday after the big sell-off in recent weeks. The decline was largely due to the LME lending changes.

However, analysts caution that there are bearish reports from the stainless steel industry.

More than 50 per cent of the stainless steel prices in Europe and US are based on ally surcharges, which are in turn based on the nickel price during the 2-3 months before delivery, an expert explained adding as a note of caution that buyers of stainless steel are now likely to cancel or delay orders in anticipation of a certain fall in stainless steel prices in the next 2-3 months.

This mechanism is negative for nickel and stainless steel demand as it feeds on itself.

Oil: Prices are firming up. A series of factors accountable for the renewed strength in prices include tightening fundamentals.

Some of the key global balance data released recently have reinforced the consensus around the view that a significant tightening in global balances is underway.

Demand Conditions

Even the traditionally more conservative OPEC Secretariat oil market balances now exhibit a considerable gap between the projected average call on OPEC crude in 2007 and current OPEC production levels.

The US weekly oil statistics are also bullish with demand conditions remaining healthy, refinery production alarmingly low and oil product inventory situation at its tightest since October 2005, pointed out an expert. Broader geopolitical concerns refuse to fade away, adding so much more uncertainty to the market.

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