The Hindu Business Line : Gold tumbles on Dubai debacle, but investor interest to stay positive

Whether another contagion is in the making is unclear at present, but last week's financial crisis with Dubai as the epicenter surely stoked fears of a possible repeat of what happened last year beginning with the subprime crisis in the US. Broad market confidence has surely stood shaken. Commodity markets across the spectrum were affected even as investors were quick to exit long positions.

Oil prices came under pressure for sure following Dubai's distress. Extravagant projects in the Emirate are now struggling to pay their debts. In base metals too prices were lower across the complex. News from Vietnam added to the uncertainty. The favourite safe haven asset gold was no exception. After closing at a fresh high on Thursday, prices of precious metals fell. Risk appetite was hit for sure. Even agriculture prices traded lower.

Public holiday in the US meant thin trading conditions. Clearly, it may take a few days for the markets to gauge the ramifications of what happened in Dubai and possibly regain confidence. Macro-economic experts are sanguine that the risks of contagion are rather limited. Initial fears have to abate. In the event, there exists the strong possibility of prices gaining upward traction across the commodity complex.

With its ravenous appetite, China continues to be mover and shaker of the global commodity markets. China's October data suggest strong imports of energy commodities and some agricultural commodities such as corn, sugar and cotton. But for base metals weakening trend from all-time highs of earlier this year is seen. Chinese demand is seen supporting global coal prices too.

Gold: Long liquidation marked the gold market towards the end of last week as concerns over Dubai affected risk appetite. On Thursday, prices closed at a new high of $1,192.6 an ounce, but tumbled the next day following the unexpected Dubai debacle. Silver was no exception as it fell by 5 per cent to a two-week low of $ 17.66/oz.

According to analysts, concerns about Dubai have had a strong impact on risk appetite and the dollar has strengthened significantly. In turn, gold has been called upon again to meet margin calls elsewhere. However, despite heavy liquidation prices were seen bouncing back from the lows reached earlier in the day.

Gold prices could come under further bouts of pressure should risk aversion spread. However, should the Dubai crisis be self-contained as macro-economists believe, then the metal must resume its upward march. Strong investor demand has surely propelled the yellow metal higher in the past month. The official sector is now turning a buyer rather than a seller. The technical picture is strong too. ETP holdings continue to edge higher and have hit a new peak of 1766 tonnes.

Given all these positive indicators, gold should bounce back sooner rather than later, unless of course the positive market sentiment shifts completely.

Crude: Prices came under pressure late last week because of Dubai's financial crisis. Pessimism pervades the market. Whether Dubai is a one-off affair or the first domino to fall in what could be the spreading of financial crisis to emerging markets is unclear. At least in the short run, crude market is likely to be under pressure until clarity emerges. Short forays below recent trading ranges cannot be ruled out.

It must however be emphasized that there is no underlying shift seen in the oil market fundamentals. Analysts see $ 70 a barrel as the minimum sustainable price that would not severely depress long-term investments. Upside to the market will surely be guided by producer policy.

Once the initial fear abates, oil prices should once again revert to their recent trading pattern given the favourable fundamental picture.

Base metals: The complex has strong relationship with economic growth and any concerns over growth are sure to affect prices. The financial crisis emanating from Dubai and to a lesser extent from Vietnam did affect base metals last week. Assuming that it is an isolated event and will be contained soon, a strong upside to base metals is seen.

Copper and zinc are seen as having strong upside potential. Copper is facing supply problems with labour issues coming to the fore. Zinc is an early beneficiary of OECD demand recovery. Galvanised steel mills are quickly ramping up production. Although inventories are rising, stock-to-use ratio is still price positive for both metals.

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