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M.R. Subramani

Chennai, Sept. 23 Gold prices are expected to rally to new highs in the next one month as the spot prices in the global market have topped the seemingly strong resistance level of $700 an ounce. Prices during the weekend were quoted at $731 an ounce.

The current bullish trend in the yellow metal will hold as long as the prices in the global spot market hold above $700, according to Kotak Commodity Services Ltd.

Factors that have increased gold buying sentiment are problems in the US markets, increased buying in India due to soft domestic prices, rise in investment buying and inflationary pressure, says Mr Sahil Kapoor, Kotak’s analyst.

“We feel inflationary pressure in the world economy has not reduced. It will pick up even further in the coming months and quarters as agricultural commodities become more expensive worldwide,” Mr Kapoor said in a note on recommendations that hold good till October 20. “Higher crude oil prices will infuse lot of multiplier effect on other component of total demand in the world pushing world inflation ahead,” he said.

Gold prices will take support from monetary policy decision all over the world. The US Fed, in particular, is expected to reduce interest rates again if the credit crunch continues to haunt the markets.

The September 18 decision of Fed to cut the rates by 50 basis points has sent a signal that the US is worried about possible recession, besides credit crunch. Though the Fed has abstained from supplying more dollars into the system, there is excess liquidity, which has led to inflationary expectation. In the months to come, these could be probable event for investment demand in gold.

Though investment demand in gold has been on the wane since 2006-end, it is expected to pick up from this month and the quarters to come.

The unwinding of the yen carry positions is another interesting event that can occur in the market. The lower interest rates in the US and expectation that UK rates might have peaked out gives rise to the belief that there is high risk in unwinding of carry trades. This could lead to some correction in gold prices but the dollar may weaken further as carry traders could shift to the euro or sterling pound.

The current market problems are far entrenched with the structure finance industry which may present itself as a difficult one to contain. This would create more investment demand for gold as it gains in all currencies, says Mr Kapoor.

Indian demand for gold may rise further as the overall sentiment has been buoyed by low prices in the domestic market. The strengthening of the rupee has reduced gold price gains in the Indian rupee and made the yellow metal’s buying cheaper. Indian demand, which is witnessing a good jump, is likely to surpass the landmark of 1,000 tonnes this year. Gold demand in the first half was 528.2 tonnes, including jewellery and net retail investment, against 715.5 tonnes during 2006.

Also, demand for coins and medallions is likely to increase by 10-12 per cent as they are seen having better resale value.

Buybacks by producers in the first half of 2007 have taken de-hedging to higher levels. Barrick eliminated 78 tonnes of hedged gold to leave the company’s production unhedged till 2010.

Gold de-hedging is expected to slowdown in the coming quarter as most of the producer’s exposures have been eliminated.

The rupee has strengthened significantly in the last one month and it is expected to remain strong for another month.

Though fears over the stability of the United Progress Alliance Government at the Centre may weaken the rupee, it is expected to remain nearly 40 levels against the dollar for the next one month.

Charts show that if gold prices fall below $725, then correction is expected to take place till $717 in the spot market. There is strong support at $712, while the yellow metal is up with resistance at $736 and $742. Once it goes past $736, it is expected to head towards $742.

Strategy for investors will be to buy on dips. On MCX, if gold falls below Rs 9,340 for 10 gms, then a correction is expected between Rs 9,280 and Rs 9,300.

There is strong support at Rs 9,284 and Rs 9,220, while resistance points are Rs 9,460, Rs 9,540 and Rs 9,621. During the weekend, spot gold ended at Rs 9,520. On MCX, October contract was quoted at Rs 9,415, November at Rs 9,468 and December at Rs 9,516.

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