The Hindu Business Line : Gold may trade in the range of $800-950

What a week it was – a real bolt from the blue. Notwithstanding the $700 billion US bailout package, the global financial crisis seemingly deepened. Stock markets across the world tumbled; currencies gyrated violently; and under the lead of crude and base metals, the commodities markets took a big beating. It was a rare spectacle to bewilder the world in recent decades.

Financial, equity and commodity markets have all been gripped by fear that strains in the international financial system will impose a severe slowdown on the global economy. If any proof was needed, the latest OECD composite leading indicators (for August 2008) clearly signalled a strong slowdown in major economies (including the US and Eurozone).

Even China, the eternal growth phenomenon, is beginning to slowdown.

The wheels of the international financial system are not spinning freely, meaning that the flow of finance necessary for continued international economic growth has been impaired. The international economic outlook has weakened, an analyst succinctly observed.

Energy beatings

Energy market took a big beating. Crude fell below $80 a barrel for the first time since September 2007. Thermal coal prices tumbled. The front month Newcastle contract was down $11.5 a tonne, decline of 10 per cent, to $105/tonne.

Base metals plummeted on the LME on Friday, bringing an end to what must undoubtedly have been the worst week ever in terms of falling LME metals prices.

Copper slid by a further 9.4 per cent on Friday, extending its weekly losses to 28.5 per cent. Declines of similar magnitude were also seen in lead and nickel.

Gold

This precious metal stands out as a commodity that may continue to find safe-haven support in the current unsettled international financial market environment. At least in the short run, the dollar is unlikely to gain strength against the Euro, which should favour an upside for gold.

Indeed, last week, gold prices were largely dictated by the financial market turmoil and even softer crude prices and firmer dollar could not prevent an upward thrust. Although gold has been trending lower, it is finding rather tough to decisively break through the $900 an ounce barrier.

It is only safe haven buying in the face of tumbling stocks that boosted gold. On Friday, in the London spot market, the PM Fix was at $900.50/oz, up 1.9 per cent from $883.50/oz of the previous day.

Going forward, the yellow metal can be expected to face volatile conditions as it is likely to be buffeted by diverse factors. The market fundamentals have not changed, though. Inflation is perhaps not an issue any more; indeed, recession fears are gripping the market.

In the short-run, positives for gold include a weakening dollar, lower economic growth, further Fed rate cut and tight credit conditions. Investors in search of a safe haven have increased holdings in the largest physically-backed gold ETF which now stands at a record 764 tonnes. The positive market sentiment will expose the metal to further upside potential.

Over the coming year, however, the dollar is seen having a further upside against the Euro which should pressure gold down. On the demand side too, there is evidence that high and volatile prices keep consumers and investors at bay. There was a sharp drop in jewellery demand in the first half of this year.

A factor to be noted is that gold failed to significantly rally in the face of supportive news such as financial market uncertainty. A market that cannot rally on bullish news is susceptible to further downside potential, remarked a technical analyst. Gold may trade in a wide range of $800-950 an ounce in the next few days, depending on developments in the financial and currency markets.

In Mumbai, spot gold traded at record Rs 14,300/10 gm on Friday.

Prices spurted because of continually weakening rupee which makes imports expensive. At these elevated price levels, there is bound to be consumer resistance.

Base metals

Prices have fallen sharply to fresh multi-month and multi-year lows. Gyrations in the wider financial markets and recessionary fears have depressed the sentiment. Inventories are rising because of limited off-take.

Sentiment is rather poor and confidence is at the lowest level.

Last week, and especially Friday last was perhaps the worst day for the base metals complex, with copper falling to its lowest level since March 2006 ($4,807/t); nickel fell to a fresh low since November 2005 ($12,175/tonne); lead prices have been the weakest since November 2006 ($-1,490/t); and aluminium at the lowest since December 2005.

Until the financial markets settle down and growth begins to show signs of revival, the base metals market is unlikely to see any big upside move.

Developments in China need to be watched closely.

Crude

Prices continue to trade in a volatile fashion, but a clear downward trend is discernible. Central to the current price weakness is the demand side weakness with which the market is preoccupied. Demand growth is shrinking.

IEA reduced 2008 demand growth. The recent data flows do little to allay the fears of demand compression. Seasonal demand is expected to pick up into the fourth quarter.

The OPEC has scheduled an extraordinary meeting on November 18. The meeting may examine supply management (read, production cuts) in the face of falling prices. This can potentially lead to a rebound.

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