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G. Chandrashekhar

But fundamentals weak; other macroeconomic factors turn bearish

Mumbai , Nov. 26

Is the yellow metal readying for a vault higher? Seems so, looking at the combination of factors. Weakening dollar (Euro/US$ has touched 1.30), expectations of central bank purchases and rising exchanged traded fund (ETF) inventory have combined to bring about a change in sentiment.

Increasing exposure

Last week, gold closed a shade lower than $639 an ounce, the immediate provocation being weakness of the dollar.

However, CFTC data clearly shows that speculators are increasing their exposure to Comex gold with net fund length rising.

Experts assert that the sentiment of tactical investors towards gold has turned positive, after a period of range-bound trading and consolidation. If the expectation of strong recovery in oil prices and continued dollar weakness in the months ahead materialises, there clearly is potential for upside from the current levels.

Fundamentals weak

Fundamentals, however, are weak and factors other than macroeconomics have turned bearish in recent months. Rising prices are likely to lead to further demand compression, especially in price conscious markets such as India. According to a London-based technical analyst, gold and the dollar have not been reliably correlated since late 2004; but with Euro/US$ threatening to break higher, correlation bulls will have a reason to watch. There is an underlying bullish trend that continues to simmer below the surface of the current consolidation. The dollar is throwing off bearish signals and threatening to break out of its 6-month range.

This could turn out to be an opportune time for the correlation to snap back in place and help drive gold higher, the analyst argued. At the price outlook session in a commodities investment conference in Ahmedabad last week, expert panelists were near-unanimous in their view on the upside for gold from the current levels.

Prices could move higher to the $640-670 range. Importantly, analysts are more upbeat about the prospects for silver. The metal could spurt to $15 and then on to $17-18, they said.

Rising industrial consumption (electronics industry) has emerged as a strong demand driver; and importantly, unlike gold, there is no real threat of any central bank sales.

Base Metals

Prices of base metals, except copper, have risen strongly in the last one week. On the LME, while nickel is up 13 per cent, zinc is higher by 12 per cent. Weakness of the dollar is cited as the main reason for the drive up. However, nothing fundamentally has changed in the market. This raises suspicion of short covering and fund buying. There is apparent surge in funds and renewed buying interest on LME.

The sentiment towards copper has turned negative especially among speculators. The important base metal has moved into a surplus territory. From 2,33,000 tonnes deficit during January-August 2005, copper has moved into 84,000 tonnes surplus same period this year. OECD composite leading indicators have not been helpful as they suggest a slowdown, in addition to slackness in Chinese demand.

In case of other base metals, physical shortages and getting more pronounced. Vulnerability to supply disruptions continues to be a factor.

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