The Hindu Business Line : Gold prices may remain at the mercy of $ movements, oil prices

With physical demand staying strong in key markets - large seasonal purchases by India, for instance - gold prices may recover some lost ground in the last quarter.

G. Chandrashekhar

Mumbai, Sept 14Pessimism over global economic growth prospects, expectation of fall incommodity demand (mainly energy and metals) and further strengthening of the US dollar continue to affect the commodity markets. The sentiment is clearly subdued, although it is surely not a case of gloom and doom.

Recent economic data too are far from inspiring. In this environment of uncertainty and lack of enthusiasm, even information that should ordinarily support prices — such as reduced crude oil output from OPEC or output cuts forecast by mining companies — has had little impact on market direction. Across markets - energy, metals, agriculture - futures prices are continuing to fall, supported ably by either improved production prospects (like in case of agriculture) or slowing demand (energy, metals).

Gold

Weaker sentiment continues to weigh on the precious metals market. In the short-term, gold prices are likely to continue to be at the mercy of dollar movements and oil prices. There surely is a revival of interest in physical buying; but the external environment has caused investors to reduce their exposure towards the precious metal.

A further strengthening of the US dollar is proving negative for gold and the market has continued to fall. For how long will gold remain under the hammer?

Clearly, at least for the time being, investors have deserted the precious metal renowned for its status as safe haven and hedge against inflation. The lobby of gold producers that had fervently hoped for a large spike in prices to four-digits must be really disappointed that investors have fled the market. It should go to prove once again how fickle investor interest can be and that such interest cannot be sustained for long.

In the coming months and over the next year, gold price is likely to be a function of the competing influence of recovering global gold consumption versus diminishing investor interest, especially in the context of realignment of exchange rates.

With physical demand staying strong in key markets - large seasonal purchases by India, for instance - gold prices may recover some lost ground in the last quarter. Falling energy market too is proving negative as inflation would slowly cease to be a major issue.

In the London spot market on Friday, gold PM Fix was at $750.25 an ounce versus the previous day’s $740.75/oz and the recovery was on account of a slight weakness in dollar and firm up in crude oil under threat of hurricane.

In the precious metals complex last week, palladium prices had fallen to their lowest levels since October 2005, trading at an intraday low of $212/oz, before recovering.

Platinum too was under pressure when it touched a 21-month low at $1,138/oz. Silver had prices dipped to about $10.25/oz. The precious metal market is not ready for a recovery as yet.

So long as the dollar continues to gain strength, prices of dollar-denominated commodities will remain under pressure.

According to technical analysts, in the short term, gold is finding support at the current relatively low levels (around 740-750). Despite a movement upward (largely seen as a correction) on Friday, it is yet to decisively breach the old low of 773/775.

The market could come under downward pressure in the coming days. In the bigger picture, greater bearish signals remain in play and ultimately gold has the potential to push towards 630. Forecasts of dollar appreciating against the euro over the next 2-3 quarters bear this out.

Base metals

Despite recovery in prices towards the end of last week, the sentiment in the entire base metals complex remains weak. The sentiment is driven by broader macro-economic as also financial and currency market factors. Economic slowdown has clearly had an adverse effect on physical demand.

Until physical demand picks up, the base metals complex will remain under pressure. Tin prices have the potential to increase beyond $19,000 a tonne, supported by fundamentals - low inventories and poor supply side performance from the world’s two largest producers China and Indonesia.

Zinc stocks are rising, demand is weak and supplies are growing. So, it is the metal with the biggest downside potential.

In case of nickel, demand remains weak; but production cuts and high production costs are likely to limit the downside. Copper prices would stay subdued until a pick up in Chinese buying as LME stocks are building.

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