The Hindu Business Line : Gold may move higher, but with corrections

Mumbai, Jan. 6 Advent of the New Year could not have been more propitious for the world commodity market. Commodities have begun 2008 with a bang and interestingly, the price performance has been across groups — energy, metals and agriculture.

Four commodities reached all-time highs. WTI crude broke above $100 a barrel for the first time, encouraged by falling inventories and tightening fundamentals. Both gold and platinum prices achieved new highs, triggered by a combination of geopolitical tension, rising crude and falling dollar. Soyabean oil futures hit record levels in the wake of apprehended decline in output following dry weather forecast for Argentina.

Speculative Activity

According to experts, despite prices mostly posting gains across the commodity complex throughout last year, there is no evidence that this has been primarily driven by speculative activity. Indeed, there are very few commodities, with the exception of precious metals, where non-commercial length is greater than a third of total open interest. In crude it is less than 5 per cent. The vulnerability of any single commodity market to fund long liquidation looks limited. In the New Year, broadly, favourable fundamentals are expected to support new highs in the precious metals, agriculture and energy markets, while base metals would continue to track expectations of global growth.

Gold: A combination of rising crude oil, geopolitics and broader market concerns last week encouraged investors to flock to gold, the well-known safe haven investment. On last Thursday, amid choppy conditions, after testing $869.05 an ounce, gold settled at an all-time high of $862.8/oz.

In the London cash market, on Friday the PM Fix was $855.00/oz, compared with $858.85/oz the previous day. Silver followed suit. Friday London AM Fix was $15.28/oz versus $15.38/oz a day earlier. Gold continues to track the dollar movement. Foreign exchange strategists believe, over the coming months the dollar is likely to be range-bound which should underpin gold prices.

However, safe haven buying triggered by geopolitical tensions and broader market concerns could drive prices higher in the near term. Further Fed rate easing would be supportive. Strong investor demand emerging upon price dips should provide solid footing to prices. The high speculative length in gold creates potential for short-term price correction. It is wise to buy on dips, as there is a strong upside potential for the yellow metal in the medium-term.

Technical analysts point out that 865/866 channel resistance continues to act as a near-term hurdle, but the trend clearly is upward. The next target is 889. It is also suggested that in terms of the bigger picture, the strength of gold against the Euro, Swiss Franc and the Canadian dollar indicates that gains are a function of strong underlying demand rather than just US dollar weakness, which in turn, speaks about the strength of the bull move, calling for significantly higher levels to come.

Demand Compression

The next big move higher could bring gold within striking distance of the psychologically important target of $1,000; but before it is achieved, there would be pullbacks. The odds clearly favour a run toward $1,000/oz and potentially beyond.

Platinum prices too settled at a record high on Thursday gaining $12 to close at $1,550/oz. The market was boosted by strong fundamentals on the back of a spate of supply disruptions recently. In the London market, platinum PM Fix on Friday was $1545/oz versus previous day’s $1535/oz. The Indian bullion market closely follows international price trends. With gold breaching the psychological Rs 11,000 per 10 grams mark, demand compression from the non-investment household consumption sector could become more evident. Gold is simply going beyond the reach of ordinary people.

Customs duty

Speculators who closely track the global market price movements are of course able to benefit from the current bull run by taking a long position. Because gold has now become affordable only to the rich and of course speculative investors, there could be a case for hiking the customs duty on gold import.

This will boost revenue for the exchequer. India spends close to Rs 50,000 crore on gold imports. A hike of Rs 100 per 10 grams will net nearly Rs 750 crore.

Consumers who can afford to buy gold at Rs 11,000 per 10 grams cannot complain having to pay a small additional tax of Rs 100.

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