The Hindu Business Line : Picture not gloomy for gold despite crash

Advertisement

Mumbai March 4 Heightened concerns over the US economic outlook, increased volatility in global equity markets and jitters surrounding the recent partial unwinding of Yen/$ carry trade resulted in broad-based declines in metals prices on Friday and over the week.

No exception

Gold was no exception and so were all precious metals. They failed to gain traction despite firm crude prices and rising geopolitical concerns. Dollar strength and stronger than expected US ISM manufacturing data weighed heavily on the market.

The yellow metal fell by more than $20 an ounce on Friday. London PM fix was $651.90/oz, down 2.8 per cent on Friday and down 4.6 per cent over the week. The bloodbath in the market left many bulls wounded. Hopes of the metal breaching $700/oz were dashed.

Indian market felt the tremors of events in London and New York and declined by over Rs 250 per 10 grams.

Not gloomy

According to analysts, despite the crash, the picture is not gloomy. The prospects for gold over the current year are positive, as the series of key price-determining factors are turning favourable.

On the fundamental side, fabrication demand appears to be consolidating after last year's sharp decline. Barring sharp price spikes and volatility, the demand side seems to be looking healthy with Asia again attracting attention.

Dollar weakness, oil price strength and geo-political concerns manifest themselves from time to time and refuse to fade. As the broad picture is still positive for gold, analysts believe, the current fall should be seen as a blessing in disguise. At current prices, the yellow metal provides a buying opportunity.

In the cash section of LME, all base metals fell. A larger-than-expected decline in the February reading of US consumer sentiment by the University of Michigan contributed to the negative sentiment on Friday. The market has also been closely following the tightening monetary stance in China.

Zinc dropped 8.0 per cent over the week to $ 3,320 a tonne. Aluminium fell 5.3 per cent and copper 4.3 per cent. There are apprehensions that Chinese may not be in the market for base metals as aggressively as they were in 2006.

While China's demand would remain robust, their last year's policy of forward coverage - which pushed the market to newer heights - may be played down this time.

On the other hand, the recent strength in copper prices indicates that the Chinese have worked off their excess inventory and may be back in the market for more.

Funds continue to play a critical role. Investment interest in commodities in general, and metals in particular, is unlikely to wane anytime soon.

Oil prices rose to new 2007 settlement highs for the seventh straight trading day on Friday, with April WTI settling at exactly $ 62 per barrel. Gasoline continues to be main driver for the complex. According to experts, the strength of the US weekly data has remained the key support for the market, and in particular the maintenance of extremely strong demand growth across all oil products. Given that strength, any knock-on effects from nervous equity markets seem merely to be constraining the extent of oil's rise rather than reversing it, commented an analyst.

Market Factors

Given the demand-supply fundamentals and other usual market-moving factors, the market seems to have an upside.

There is also the possibility of momentum players moving into the long side.

This might yet provide further impetus to move on to the next leg towards $ 65/barrel.