• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Brand Quest
• The New Manager
• BL Club
• Smartbuy

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth
• Events 2007

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

Strong performance: Gold prices have found strong momentum through weak dollar.

G. Chandrashekhar

Mumbai, Dec 14

A slew of fiscal, monetary and stimulus packages announced by several governments around the world – the US, China, Europe, India and so on – are yet to exert their impact on commodity markets although under normal circumstances infrastructure spending of a high magnitude should spur demand for industrial metals such as steel as also base metals and cement.

Last week, saw commodity prices bounce, but such bounce was more in the nature of short covering rallies that proved short-lived and the effect of a softening dollar, for instance, on gold. The market surely needs strong evidence that affirmative action by various governments is going to help reduce the severity of the continuing crisis of confidence. Primarily, signs of a demand pick up are needed.

Last week the dollar lost a bit of its strength and was seen at over 1.33 vis-À-vis the euro, down from around 1.27. A weak dollar lifts prices of commodities traded in dollar terms. Whether the latest softening tendency is temporary or signals the end of the greenbacks uptrend is still being debated. Further evidence that the currency has taken a decisive turn is required for taking a more positive view on prices.

Meanwhile, production cuts continue to be announced, especially in the metals sector. New investments are being put on hold. OPEC too may decide to effect further cuts in output. While all these actions are seen as inescapable in the current context of poor demand, they are also going to store problems for the future. These output cuts are sure to create a supply bottleneck when the process of recovery starts.

Towards the latter part of last week, the precious metal performed strongly. Prices found strong momentum through tracking the weakening dollar and rallied. Investors have begun to increase their exposure towards gold.

At the same time, rising prices are seen encouraging exit of some players ready to book profit.

It is unclear at this point of time whether Euro/USD has bottomed yet. There is a view the dollar weakness is a temporary blip. Should it be so, the upside to gold prices will be capped and the rally would be stunted. It is also known higher prices result in demand destruction, especially in price-conscious markets such as India. The metal will face tough resistance at $830/840 levels.

Clearly, the outlook for the yellow metal is bound up with prospective developments in the international financial system and movements in the dollar. Although gold’s haven status may have been somewhat exaggerated, diversification and haven demand may underpin prices for some time to come. Inflation is no more a major issue at present. Breaking the recent trend, should the USD appreciate against the euro in the coming weeks, it may prove negative for the metal.

According to technical analysts, the market is in a wait and watch mode. If gold remains below the confluence of resistance between 830/848, the outlook is bearish. In the near-term support could come at 803/805.

The complex continues to be buffeted by flow of poor economic data and fears of a prolonged recession in major economies. Prices have collapsed incredibly in recent weeks as fundamentals continue to weaken.

Rising inventory, contraction in liquidity and poor demand characterise the base metals complex. The scale of price decline in some metals like zinc and lead is unprecedented.

The failure of the US auto bailout package may exacerbate the situation. The price sentiment could weaken further. For instance, copper cash prices could breach $3,000 a tonne and rule below that level in the New Year given extremely poor demand conditions and bouts of selling.

Chartists tracing copper point out that lower-lows are likely into next year, and a move below 3,000 would indicate a test of 2,630. In the near-term, as the market has failed to push above 3,375, the outlook is neutral. The range is well defined between 3,000 and 3,375, and a break through either of these levels would likely trigger another $100/150 of follow through.

Last week saw prices get a boost by about 10 per cent following the OPEC President remarks that more severe cuts could be in the offing and the IEA forecast of a positive demand growth in 2009. However, recessionary conditions are staring many countries in the face; and the impact of bailout and stimulus packages is yet to be felt. The OECD demand continues to be weak.

From the current levels, the downside risk appears to be extremely limited. Weakening of the dollar too has aided the recent upward price movement. However, grim macroeconomic conditions at present do not appear conducive for a sustained recovery in prices. Should the low price scenario play out for many months next year, it has the potential to create supply bottlenecks through over-tightening.

More Stories on : Commodity Markets | Gold & Silver

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Copyright © 2008, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line