The Hindu Business Line : Further weakness likely in gold prices

Losing shine
Gold held by StreetTRACKS declines by 9 tonnes.
Net redemption from 5 gold ETFs worldwide put at 22.4 tonnes.
Potential for further liquidation in the near term.

Mumbai , May 21

After scaling multi-year highs in recent weeks, the gold market suddenly turned enervated with values falling precipitously last two days of last week. The metal closed at $656.20 an ounce on Friday.

With this correction, which many felt was imminent given the speculative length, the sentiment is rather fragile. Obviously, further weakness cannot be ruled out over the coming sessions.

Softening sentiment

If any evidence of the softening sentiment was required, it came in the form of redemptions from StreetTRACKS gold ETF (exchange traded fund) last week. The total gold held in trust declined by a little over nine tonnes to 344.52 tonnes, the lowest level since early March 2006, while net redemption from the five gold ETFs worldwide totalled 22.4 tonnes, according to experts.

While the large fund length in gold suggests there is potential for further liquidation in the near term, macro-economic and geo-political risks suggest that the current environment is not conducive for going short on gold. The threat of rising inflation and uncertainties relating to growth outlook continue to offer solid support to the market.

Clearly, Fed's action will be critical even as the dollar is likely to struggle in the face of rising inflation. There are no compelling reasons for a broader downturn from a technical point of view too, analysts have cautioned.

Though the metal is trading well off its recent peak, it may be important to remember that relative to the start of the month, it is still higher, commented an expert. In view of this, investors have to exercise due caution. The market has the potential to move either way.

Copper

A steep correction in the price of this important base metal last week is likely to tempt investors to go short. But, current demand-supply fundamentals still favour an upside. No doubt, concerns over the macro-economy - slowdown in global economic growth - are sure to impact base metals market as there is a positive correlation between growth and demand. Copper supply is really tight.

Importantly, supply growth numbers from International Copper Study Group remain extremely poor. Global copper mine output was flat year-on-year during January-February this year. This means that refined output growth cannot remain robust. A relatively large 1,300 tonnes drawdown in LME stocks last Friday had an immediate positive impact on prices. However, at Shanghai, copper stocks were up 7,000 tons over the week, although to a still very modest total of 45,500 tons. Experts see a continued strong upside for the copper market, notwithstanding recent declines. E o m