The Hindu Business Line : Gold vulnerable to further profit taking in short term

The flow of economic data continues to influence the commodities market. Positive data flows do impact markets positively and vice versa. Without doubt, in recent months, the flow of economic data, generally speaking, has been encouraging. Yet, occasional disappointing data flow does undermine confidence. This is what we saw in the last few days.

Although the recovery signals are turning increasingly pro-growth, there still are uncertainties along the road. Until a clearer picture generating confidence that recovery would be sustained emerges, commodity prices – especially energy and metals – will remain sensitive to data flows. In other words, expect heightened volatility over the next two months.

World Steel Association has forecast that global steel demand in 2010 will increase by 9.2 per cent, back to the levels seen in 2008. Strong growth in Chinese production is set to raise the level of output. Several expert agencies such as Macquarie Commodities Research have also forecast global steel production in 2010 will grow by about 10 per cent, spurred by Chinese growth as a result of which steel volumes would return to levels similar to 2008.

In the same vein, analysts and experts are bullish on coking coal. A majority expectation is that prices could settle above $175 a tonne, on the back of strong import demand growth in China.

On Friday, IMF Managing Director said that there were encouraging signs of an economic recovery in the US and several European economies. However, he warned that government stimulus should remain in place until unemployment peaks, which may be 10-12 months away.

So, investors have to be cautious and look for economic data and examine their nature. The US dollar that went on a depreciating spree reversed direction last week. It is unclear if it is sustainable. Currency factor is increasingly seen impacting commodities in general and gold prices in particular.

Gold: Last week saw profit-taking in the yellow metal following the dollar gaining strength and weak equity markets. Prices dipped below $1,030 an ounce during the week, only to bounce back towards the week-end.

In London on Friday, gold PM Fix was at $1,040/oz, virtually unchanged from previous day’s $1,040.50/oz. Silver defied the trend. On Friday the AM Fix was at $16.57/oz, up from $16.33/oz the previous day.

Going forward, further profit taking in gold looks likely, especially if the dollar strengthens. However, a strong technical picture and widespread expectation that the dollar would weaken can buoy prices. Experts are now asserting gold’s new-found broad appeal for investors and are revising their price forecast for Q1 and Q2 of 2010 upwards.

Base metals: Last week witnessed highly volatile trading conditions with less encouraging data flow. Copper fell 2.6 per cent on the previous Friday’s close.

Overall, it appears that conditions for a boost to metals demand in the OECD region early next year are getting into place. However the actual timing of demand revival is still subject to conjecture. Concerns about Chinese imports have also not waned.

The dollar, equities and flow of macro-economic data will exert a combined influence over the base metals complex in the coming months. Beyond the short-term, the projected recovery in global economy over the next 12 months remains firmly supportive for the base metals market. Copper and zinc prices enjoy strong upside potential.

Crude: There is gradual improvement and consolidation in some key market parameters. Prices have now decisively moved into a higher range of $70-80 a barrel. Current oil prices appear to be justified from a fundamental perspective, experts point out. Demand overall is improving with improvements seen in the US and Japan, key markets. The groundwork for a sustainable move into higher price ranges is being laid.

Related Stories:
Fundamentals, more than dollar, seen driving commodity prices
Is gold a safe-haven asset?

More Stories on : Gold & Silver | Commodities

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

Stories in this Section
Pusa-1121 prices crash on bumper crop

Core of N-E monsoon rains biding time to enter mainland

Will India cope with emerging food security challenges?

No Boeing deliveries to India till end-2010

Private sector hikes wage bill, but cautiously

Wooing talent with paid internships

Clean coal tech gets leg-up from oil cos

Centre may auction captive coal blocks

Shipping cos’ Q2 net sinks, as freight market remains damp

Gold futures to correct lower

Gold vulnerable to further profit taking in short term

New provision cover norms to cost banks dear

Correction mode likely to stay

Weak trend persists in L&T