The Hindu Business Line : Gold to make additional gains in near term

Both crude and gold that fell sharply on Thursday last have the potential not only to regain their losses, but also make additional gains in the near future. Fundamentals and macro-economic conditions are supportive of a rise in both commodities.

After breaking through $650 an ounce, gold, together with crude, fell sharply on August 10, largely as a reaction to uncovering of plot against transatlantic air travel.

Decline of $15 an ounce in gold price was clearly the result of fall in crude prices and firmer dollar.

Dampened sentiment

Experts reasoned that the fall of $2 a barrel was the result of fears that the UK incident would reduce travel demand or create economic weakness, which dampened the sentiment among oil market participants.

The dollar drew support from falling crude market. Strengthening of the currency induced fund players to start to lock-in profits that, in turn, triggered a change in sentiment. However, the catalysts to falling prices might prove temporary. A $15/oz fall in gold is sure to re-energise buying interest in the metal, which has of late been testing higher levels.

Support may wane

In addition, the support from easier crude prices is expected to wane.

The oil market reaction was perhaps exaggerated and overdone, analysts assert. There is potential for the oil market to test new highs in the months ahead primarily because of strong fundamental factors - rising demand, disappointing supplies - as well as heightened geopolitical risks.

Significantly, gold is unlikely to continue to draw support from the dollar, because there is little chance of a prolonged rally in the currency.

According to analysts, Thursday's move came mostly on the back of a squaring of short positions in the wake of the release of the US trade deficit data for June.

Dollar trend

On the other hand, broad macro-economic conditions suggest that the time for the dollar to undertake a clear downward trend is approaching fast, argued an expert.

Clearly, with Fed's rate hike pause after two long years of tightening, inflationary pressures are bound to build. Since mid-2003 initiatives on the interest rate front have been supportive of the dollar.

A suspension of the rate hike is sure to prove negative for the dollar and in turn, positive for gold.

The yellow metal's position as a hedge against inflation is well known. The July US CPI survey expected this week is also more likely to spark a further weakness in dollar.

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