The Hindu Business Line : Gold likely to stay firm above $800/oz

The yellow metal is expected to increasingly and more closely track dollar movements. Foreign exchange strategists believe, in the short-term, US dollar is more likely to respond to negative news about the US economy, given the prevailing bearishness on the currency. This should bode well for gold.

It must, however, be remembered that some really hefty speculative long positions have been built in recent weeks.

Any near-term appreciation of US dollar will result in a mad rush to liquidate the speculative long positions. So, upcoming US data and their impact on the currency have to be watched.

The US non-farm payrolls rose by 1,66,000 in October. This shows some resilience in the US labour market, and helps reduce fears of an imminent US recession.

Otherwise, the overall supportive factors are still almost intact. Anticipated continued weakness in US dollar, geopolitical environment, high oil prices and inflation concerns show no signs of waning. Interestingly, at every price dip, strong physical demand emerges, lending further support.

A combination of all these may see gold move decisively past the $800/oz mark soon. On Friday, gold surged past $800 in New York and ended at $807.70 an ounce. It is expected to stay firmly above $800. Technical analysts prefer to stick with the uptrend, particularly when gold remains supportive above $777 (though trendline support above $785 matters near-term).

If there is a close above 807, it would clear way for a retest of the all-time high of $850.

Copper weakness

Base metals: China continues to be the mover and shaker of the world base metals market. Chinese consumption and demand growth are key to unlocking the mysteries of this market. Sustained weakness in world (ex-China) copper and other base metals demand is likely over the coming months.

In turn, world base metals demand growth is likely to be increasingly reliant on growth in Chinese demand. This has been the case over the past year. Indeed, China’s copper usage kept the world copper market in deficit until July this year. Concerns on the health of the US economy and movements in the wider financial markets continue to be a key driver of near-term price movements, while LME inventories and weakness in physical premiums are dampening sentiment towards the complex.

Inventory levels will stay low and in a number of markets including copper, nickel and tin, inventory levels early in 2008 are forecast to fall to fresh lows in the current cycle. Copper, in particular, is at risk of considerable fundamental tightening with raw materials in short supply, and the prospect of a bigger pick up in Chinese buying before long.

Strong fundamentals

Lead fundamentals are strong too with Chinese exports still falling and the potential for a pick up in buying during the strong-demand battery season. Last week, copper finished the week down 5.9 per cent in line with increases in copper exchange stocks. Zinc remained down over the week after a 19,000 tonne rise in stocks.

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