The Hindu Business Line : Bull run in gold likely to continue

GOLD's recent rally is largely based on technical factors and reinforced by the yellow metal's recent impressive gains, while the continued divergence of gold from the Euro weakness is a helpful factor, according to experts.

With the bullish mood appearing to be firmly entrenched, prices should have further room on the upside, with the next target at $ 510 an ounce and beyond. Huge fund interest is a positive for the market. Technical analysts point out that in the absence of any trend-ending scenario, the metal could target higher levels.

On the other hand, there are those who advocate caution. The market could get choppy, especially given the massive speculative length on Comex. A large speculative length inherently creates a downside risk. However, currently, it is difficult to identify what would trigger a change in sentiment.

Interestingly, reports of Asian central banks buying gold are doing the rounds again. Many thought the two-year old idea was truly buried. There are reports that central banks in Asia including China are expected to further increase their gold reserves.

However, it makes little commercial sense for central banks to augment reserves at the current high prices. Some small purchases cannot be ruled out, though. There seems to be a tacit assumption that China, Japan and India (all of them have large foreign exchange reserves) would augment their gold holdings to 10 per cent of their reserves (to serve any meaningful diversification purposes).

If that were to happen, it would mean purchase of 328 million ounces of gold (at the current high price of $ 500/oz), experts say, adding that the volume represents about four years of mine production. On the other hand, European central banks are sellers whose agreement highlights the difficulty of exiting a large physical position in gold.

European central banks have agreed sell a maximum of 2,500 tonnes during the five-year period and not to sell beyond the maximum of 500 tonnes each year during the agreement. Such an arrangement can also prove to be deterrent to central banks in other parts of the world to increase their gold holdings significantly.

With prices in the domestic market tracking international trends and the price spike exacerbated by weakening rupee, conditions for price-induced demand compression are getting stronger within the country. Scrap sales are growing.

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