The Hindu Business Line : Gold vulnerable to short-term correction

What’s in store
Gold’s next target of $800 an ounce should be reached in a matter of weeks.
Demand compression is likely in India as consumers are known to be price-conscious.
Tin fundamentals still look undergoing further tightening.

G. Chandrashekhar

Mumbai, Oct. 28 Buoyed by rising crude, weakening dollar and mounting geopolitical concerns, gold marched ahead last week to test the highs seen last as far back as in January 1980. Investors are flocking to put their money on the yellow metal, yet again proving its status as a safe haven investment.

Positive factors

Speculative interest in gold has hit an all-time high. Non-commercial positions on the COMEX gold market stand at over 40 per cent of the total futures positions. Recent gold positive factors jittery stock market, weakening dollar and growing inflation concerns – look likely to persist for some time, according to experts.

All that means gold will likely continue to trade with an upside bias. However, as non-commercial positions are nearing the all-time high of 49 per cent of total futures positions, the market will be vulnerable to changes in investor sentiment. It is yet unclear what can drive a change in investor sentiment. So, the precious metals vulnerability at the current high levels cannot be ruled out.

It is also most likely that from here on, there would be profit-taking at every rise. But given the upside bias, every dip should provide a buying opportunity. There is near unanimity of opinion that the yellow metals next target of $800 an ounce should be reached in a matter of weeks.

In addition to flow of speculative funds, on the physical side, emergence of demand at every price dip is providing solid support to the market. This is further aided by sustained build up in ETF positions.

Taking a cue from global trends, Indian gold market too has spurted. After briefly breaching the psychological Rs 10,000 per 10 grams, the market dropped back to four-digits. At these high levels, there is sure to be some demand compression as Indian consumers are known to be price-conscious. High prices would also encourage scrap sales.

Changing perceptions of global economic health and geopolitics continue take their toll on the base metals market. There has also been a slight rise in inventory levels. But it maybe instructive to note that metals market fundamentals continue to look strong. Even a slight slowdown in the US may be largely neutralised by robust demand in other regions of the world (Asia, in particular).

Inventory levels will stay low and in a number of markets, including copper, nickel and tin, inventory levels by early 2008 are forecast to fall to fresh lows in the current cycle, experts asserted, adding that copper was at the risk of considerable fundamental tightening with raw materials in short supply and the prospect of a big pick up in Chinese buying before long. Tin fundamentals still look undergoing further tightening ($16,400/t). Nickel prices at the front end of the curve are strengthening ($32,000/t) and there are signs that the de-stocking process at European and Asian stainless steel stockists is coming to an end.

Crude

Oil market is truly on the boil. Evidence of a further tightening of the crude oil market continues to mount with fall in the US crude inventories and deteriorating stock position in Europe. The market is clearly facing a deficit. Moving further into the last quarter, the deficit threatens to expand. Experts assert the current high prices are justified by fundamentals and the door to further increases remains open.

Last week, Front month WTI settled above $90 a barrel for the first time in trading history; and later pushed above $ 92/barrel. Front month Brent also closed at an al time high. The combination of worsening fundamentals and mounting geopolitical tensions has created a platform for a sharp push up in prices.

Winter demand is nearing. OPECs decision to raise output by 500,000 barrels a day from November 1 is seen inadequate; and in any case insufficient to cool the current market sentiment.

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