The Hindu Business Line : Gold to take lead from financial markets

What’s in store
Technical analysts see near-term focus lower for a return to $639 (June low) and lower for gold.
Copper is likely to decline further and chartists think bearish signs are difficult to ignore.

G. Chandrashekhar

Mumbai, Aug. 19 Commodity markets were hit, more severely Thursday last, by selling pressure due to widespread risk reduction by investors following uncertainty over wider impact of financial market turmoil and credit market tightness on the global economy. There was widespread long liquidation and creation of fresh short position in metals market.

Better than expected

The first port of concern is the US economy where the fallout from sub-prime defaults would be felt the most. However, recent data suggest the US economy is actually in a better shape than expected. The second quarter GDP growth numbers, manufacturing data and export figures all present positive outlook.

Mercifully, metals market rebounded on Friday. The US and European equity prices rallied following the US federal reserves decision to cut its primary discount rate (the rate at which the fed lends to commercial banks) by 50 basis points to 5.75 per cent. Despite Friday’s rally, most metals prices ended the week much lower. Tin fell 14.8 per cent; zinc was down 9.2 per cent and copper declined 6.4 per cent.

Turmoil driven

The precious metals complex dropped sharply. Driven lower by the dollar strength and financial market turmoil, gold fell. In the London cash market, the PM Fix on Friday was $657.50 an ounce, down from $662.25/oz the previous day. Silver, too, followed suit with AM Fix of $11.69/oz on Friday versus $12.37/oz the previous day.

In the short-term the yellow metal is likely to take its lead from movements in the financial market, Euro/USD and other commodity markets. With Fed intervention whether investor confidence would return to the market is tough to assess at this point of time. Yet, Fridays late rally kindles some hope.

But technical analysts are willing to train their near-term focus lower for a return to $639 (June low) and lower for gold. Below $643 on a close would also potentially complete a topping formation adding to bearish evidence, they said. Thereafter, the target would be near 610. Although trading could be choppy for the present, the medium-term prospects for a rebound look good. Silver remains capped by its Thursday breakout level (12.03/13) and also an open gap near 12.56. A weekly close below the 60-week (11.61) would be a damaging sign for the uptrend of past four years, analysts asserted adding the near-term focus is lower towards 10.47.

Base metals

On Thursday last, copper dropped below the psychological $7,000 a tonne to a low of $ 6,785/t. Zinc slid through important support at $3,100/t to hit a 14-month low of $ 2,950/t and closed below $ 3,000/t for the first time since April 2006. Nickel seems to be steadily on its way below $ 25,000/t. There was some recovery, though, on Friday.

Despite the sell-off last week (heightened liquidation with metals crashing through key support levels) we can expect further short-term losses and more volatility. However, some metals such as tin, lead and zinc appear under-valued relative to their fundamentals. These metals have the best upside potential once the markets stabilise.

Chartists think bearish signs over the past week are difficult to ignore, and copper is likely to decline further. The break below the May 2007 low has damaged the uptrend in place through most of the year, they said. The market will, of course, retest and likely exceed its 2006 peak in the medium term.

Buying opportunity

Lower prices in the metals market (both base metals and precious metals) should provide a good buying opportunity.

Some of the base metals are set to bounce back as investment in infrastructure and overall economic growthprospects are promising. The current market conditions, notwithstanding some uncertainty, provide strategic buying opportunity.

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