The Hindu Business Line : Gold at new high, silver falters

Mumbai, Sept. 19 On Tuesday, at $723.4 an ounce, gold prices closed at their highest level since 1980; and in the early trades today, the metal traded $4 away from last May’s intra-day peak of $730/oz. Following the FOMCs decision to cut the federal funds rate by 50 basis points to 4.75 per cent (greater than market expectation), and to cut discount rate by 50 basis points, the dollar weakened substantially and gold tested a fresh 16-month high. There is also expectation that the Fed would effect a further rate cut of about 25 basis points at its October meeting to fight slowing growth. Risks to inflation remain to the upside. In this backdrop of slowing growth and inflation fears, the dollar is most likely to perform poorly, something that will be positive for gold.

Indeed, the yellow metal continues to perform well, not just against the US dollar, but against most major currencies as well, experts said. According to technical analysts, the May 2006 highs of 730.50 may prove to be the zone against which a larger correction may unfold and a pullback towards 703-700 area support should be seen as buying opportunity. On the other hand, a break above 730.50 opens approximately $10 of topside for a run towards channel resistance at the 740 area.

As pointed by GFMS last week in its latest Gold Survey 2007 update, investor interest in the yellow metal is set to return, with the potential to take prices to new highs, not seen in recent past. However, rising prices may result in higher scrap sales and some demand compression, especially in price-conscious markets such as India.

price spike

Gold buyers in India have been caught unawares in this current price spike. A market trading below Rs 9,000 per 10 grams until recently has spurted to nearly Rs 9,500/10 gm. Festival and marriage season demand continue to keep the physical market buoyant. The impending harvest season and crop prospects should also prove to be positive for the yellow metal. While gold performs impressively, silver remains far more lacklustre.

Despite a 17 per cent rally from the mid-August lows, as yet, there has been no damage to the larger bearish trend from its February 2006 highs. The metal closed at $12.7/oz in New York on Tuesday, up 11 per cent from August 21 price of $11.7/oz. Analysts see a strong resistance between 13.00/13.15 and until that is breached, there is a risk of correction.

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