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A file photo of gold bars in a refinery.

G. Chandrashekhar

Mumbai, Sept 16 Uncertainty persists over the wider impact of the current crisis in the money markets and the outlook for global growth. However, the realities of supply shortages, shrinking inventory levels and healthy demand are propelling prices of many commodities higher. Gold prices have shrugged sluggishness and spiked. Investor interest drives the market.

Oil and wheat futures hit fresh all-time highs recently. Supply/demand balances in both markets are likely to stay exceptionally tight over the rest of the year.

Growth-sensitive commodities such as base metals have fared less well. But even among base metals, there are pockets of strength (lead and copper); and if concerns over economic outlook ease, big gains may be in the offing.

On Friday last, from an early pullback and after trading in a consolidation mode on Thursday, gold prices flared up to new highs in London and New York markets as the dollar came under downward pressure.

At some stage, the metal traded at a new 16-month high of $717 an ounce, a sharp rise from the previous day. In London, the Friday pm fix was $716.35/oz versus the previous day’s $704.50/oz.

In recent sessions, the yellow metal drew support from ongoing speculation that the Fed will cut the US interest rates. In the near term, gold prices are likely to continue trading sideways ahead of the FOMC meeting. From the fundamental side, rising fabrication demand continues to be supportive.

The recovery of jewellery demand in the first half of the year as reported by GFMS, in its latest update, has surely helped to underpin prices during periods of weaker investor interest. Physical demand should cushion prices throughout the rest of the year. Asian imports have been robust.

However, physical buying may become vulnerable to losses if prices continue to surge. According to GFMS, gold’s upward momentum is firmly in the hands of investors. All the external determinants are turning positive for the metal – rising crude prices, continued dollar weakness, concerns over macro-economy and geopolitical tensions. This is sure to attract speculative interest.

Technical analysts do not rule out a temporary pullback. The market is pausing below trendline resistance near 720, and following the breakout from a long-term range earlier this month, it is not uncommon to see a retest of the break out level, a London-based chartist pointed out.

There could possibly be a dip towards 695/700 as a healthy pullback. Thereafter, the uptrend is likely to resume for an overthrow of 720 and on towards the 2006 peak of 730. In the medium-term, a sustained break above 695 targets 730, then 800.

Base metals sector is the worst affected by global growth concerns. If concerns wane, the strong fundamentals of this sector would suggest significant upside price potential, especially in copper, lead and zinc.

Even nickel will move up once the stainless steel de-stocking cycle turns.

After selling off in the first week of September, most base metals prices rebounded last week, driven by the building of new long positions put in place over the week, as seen from the LME price and open interest changes. Also, huge short positions have been built in zinc and aluminium since late July.

According to analysts, copper is at risk of considerable fundamental tightening with raw material market tight, inventory levels low and the prospect of a big pick up in Chinese buying before too long very real.

Lead fundamentals remain strong with significant production losses hampering supply growth and with downtrend in LME stocks continuing.

Zinc

Meanwhile, in zinc strong demand and tightening short-term physical supply (particularly Asia) could still support a move higher.

Range-trading will continue in aluminium; but for far forward positions there is upside price because of continued production cost escalation.

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