The Hindu Business Line : Medium term outlook positive for gold

Prospects
Demand-supply fundamentals have ceased to be of relevance for gold’s direction.
Dips near $3,000 a tonne are likely to attract buying in lead.
Further softness likely in copper on concerns over US housing sector.

G. Chandrashekhar

Mumbai, July 29 Along with the equity markets, metals markets (both precious and base) came under downward pressure last week.

This reflected concerns about the effect of the US sub-prime mortgage market on the US economy and also on investor flows into commodity assets. Profit-taking is widely seen as the main driver of the sell-off across markets.

Interest rates’ fear

After an impressive run-up recently, gold once again floundered, failing yet again to decisively break key resistance levels. Despite the dollar weakening further, the yellow metal prices dropped sharply.

Investors pulled out. Apprehensions over rising interest rates around the world contributed to the sentiment that resulted in profit-taking.

On Friday, London PM Fix was $660.50 an ounce, down from $670/oz the previous day. Silver, too, followed suit with the AM Fix on Friday at $12.75/oz versus $13.13/oz the previous day. The movements in Euro/USD are likely to be key for gold prices.

Demand-supply fundamentals have ceased to be of relevance for direction. It is now dominantly a currency play, interspersed with geo-politics and inflation.

It may be advisable to buy gold on dips as the outlook for the medium-term is positive. With further dollar weakness not ruled out, crude market on the boil and still uncertain geopolitical situation, the market may eventually move higher towards $700/oz.

Base metals

Concerns about the global economic outlook, and particularly the prospects for the US economy, affected the market last week.

Prices of almost all base metals were down for the week, with long liquidation seemingly the culprit, as one analyst remarked.

While nickel and lead continue to pull back from their recent strong highs, the sell-off last week was more widespread with zinc, copper and even aluminium slipping.

Even report of production suffering due to prolonged mine strike in South Africa failed to stem the downfall.

Worst sufferer

Lead, in particular, was the worst sufferer last week. After hitting $3,500 a tonne on Monday, liquidation pushed prices to less than $3,100/tonne by the close of the week. Dips near $3,000 a tonne are likely to attract buying; so prices have the potential to bounce back.

Similarly, in case of nickel, dips towards $30,000-a-tonne level should begin to attract buyers to the market. Zinc and aluminium could come under downward pressure.

Slowdown

Concerns over the US housing sector have kept copper under pressure and further softness can be expected.

However, it is becoming increasingly clear that notwithstanding the importance of the US economy to the metals market, a slowdown there will have a less serious effect on metals prices.

Emerging countries are seen as the engines of growth and their fundamentals seem to dictate market terms.

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