The Hindu Business Line : Strategic buying of gold likely at every dip

Outlook
Investor interest likely to prove to be the key price-determining factor for gold.
Higher speculative length in gold increases possibility of short-term correction.
Zinc appears most bearish of the base metals

G. Chandrashekhar

Mumbai, Nov. 18 Gold market continued to track the dollar and crude movements. Rising with a weakening dollar and falling with a softening crude, the yellow metal witnessed high volatility last week. After falling below the psychological $800 an ounce, gold prices eased further on Friday as the equity markets weakened, oil prices dipped and the dollar modestly firmed.

In London, the PM Fix on Friday was $789.75/oz, down from the previous day’s $794/oz. Silver too followed suit, falling to $14.45/oz on Friday from $14.82 the previous day in London (both AM Fix).

Demand pattern

Based on World Gold Council and GFMS report, the market noted with interest the change in demand patterns during the quarter as investors rather than jewellery buyers became the dominant force.

The report clearly brought out the deterrent effect high prices have had on buyers. Demand in India rose by a mere 5 per cent year-on-year. On the other hand, overall supply expanded by 16 per cent mainly due to gold scrap sales.

Investor interest is once again likely to prove to be the key price-determining factor for gold which has been extremely positive in recent months buoyed by strong consensus view on prospects for continued dollar weakness, inflationary concerns and ongoing credit market concerns. However, it must be noted that so long as the speculative length in gold is high, there is always the strong possibility of short-term correction.

Still bullish

Notwithstanding the above, many experts are still bullish on gold and are revising their price target for the fourth quarter higher as the metals key price determinants have turned increasingly positive. Continued dollar weakness, oil price strength and strong investor interest combine to invest gold with upside potential.

Technical analysts perceive a correction. The ongoing corrective gold decline continues to push prices lower. The break below the 21-day average points to the $780 and thereafter $765. The correction will grind on, provided $800 caps the upside. Given the medium-term bullish outlook, there could be strategic buying of gold on every dip below $780.

Base metals

A particularly volatile week for base metals. While copper stayed unchanged over the week, zinc (at $2,525 a tonne, the lowest since March 2006) fell by a further 7.9 per cent on the week based on outlook for higher supply. Lead prices eased to a low of $3,330/tonne. Nickel prices are just about holding above $31,000/tonne.

Overall, the sentiment towards the base metals complex continues to be uncertain in the light of concerns on the health of the US economy and movements in the wider financial markets. Concerns over rising stocks and weak physical demand are also weighing on prices.

According to chartists, the near-term scenario for copper is bullish as support at $6,710/70 continues to hold firm in the face of aggressive selling.

Zinc appears most bearish of the base metals, having smashed and closed below important retracement/projection levels.