The Hindu Business Line : Gold prices may come in for correction

Mumbai, Oct. 7 Based on US non-farm payroll data (that sought to revise weak data of previous two months) released on Friday last, consensus that the US economy was not likely to face recession but experience buoyant conditions is rapidly gaining ground.

Together with recent interest rate cut, this is positive for many commodities including crude and base metals. The emerging positive picture is expected to partially neutralise the widely anticipated US dollar weakness, at least for the time being, a development that will have implications for the bullion market.

Offsetting Slowdown

On the other hand, the OECD lead indicators fell sharply in July and August, after rising strongly between April and June.

The latest data suggest that economic growth in the OECD countries will moderate in the next six months. The silver lining is that very strong Chinese growth may help offset the slowdown at the global level.

Gold: Aided by renewed weakness in the dollar, prices across the precious metals complex firmed. In London, the Friday PM Fix was at $737 an ounce, a sharp rise from previous day’s $725.50/oz. Silver too gained modestly.

Friday AM Fix was $13.44/oz versus $13.22/oz the previous day. With the surprise revision of US non-farm payroll data, receding threat of recession and lowering of interest rate, will the US dollar continue to weaken further?

It is unlikely to in the short-term, according to foreign exchange strategists. In the event, gold prices that had risen sharply on the back of dollar weakness may come in for correction.

Still, some of gold-favourable factors continue to be in place such as high crude prices, geopolitical concerns and strong physical demand. Under the circumstances, notwithstanding short-term corrections, the yellow metal will perform well through the last quarter.

Interestingly, technical analysts point to the possibility that corrective risk remains high. There is risk of a correction to $700/710. A close below $722 would confirm that a deeper correction has begun. Given the downside risk to gold, caution is advised in trading in the coming days.

As the bigger picture sill points to a run towards $800, strategic buying at every fall may be a good idea. Indian gold demand is expected to be robust.

Agricultural crop conditions are good and firm prices would translate to higher rural incomes. The rupee continues to firm gradually, partly neutralising the effect of high international prices.

Base metals: Most base metals prices rose on Friday following release of better than expected US non-farm payroll data. Lead prices surged by over 10 per cent over the week as a result of supply concerns and falling LME stocks. The record high prices failed to attract much metal onto the LME, which suggests not much spare metal is available. As seasonal demand picks up, this has significant implications for the market. On Friday, lead finished the day at the phenomenal price of $3,801 a tonne.

Copper has been performing well with the market ruling around $8,200/tonne. After several weeks of relative quiet, tin prices are showing signs of movement. Prices are likely to trade higher than $16,000/tonne because of supply limitations. According to chartists, copper’s May 2007 peak of $8,337 continues to cap price.

In the near-term, there exists the possibility of a pullback. In the medium-term, the metal has the potential to bounce back to retest the 2006 peak near $8800. Aluminium continues to be a laggard of the base metals complex. Aluminium prices seem to be settling into a $2370-$2560 range. If it continues in this range for a while, the odds for a bearish breakout are big.

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