The Hindu Business Line : Gold may trade within ranges

Prospects
Further weakness expected in dollar.
$8040 and $8125 likely to be a sticking point for copper.
Crude oil market tightening at fast pace.

Mumbai April 15 The gold market is on the boil. After dipping to a low of $671.10 an ounce on Thursday, firmer oil prices and further depreciation of USD/Euro helped the recovery process. Intra-day, prices rose by as much as $8 an ounce on Friday, helped by softening dollar. London PM fix was $681.75, up from the previous day's PM Fix of $677.25/oz.

Dollar weakness

According to foreign exchange strategists, the dollar weakness was partly related to interest rate differentials moving in favour of European and commodity currencies and also by negative news for the dollar from the step up in protection measures against China over the past few days.

Euro/USD has reached 1.35. There is expectation of further weakness in the dollar from here. It is also believed that the growth-inflation trade-off in the US is quite unfavourable for the dollar given limited spare capacity in the economy, and economic data unlikely to materially support the dollar. Technical analysts foresee a slow uptrend. They point out that despite price retracing nearly 80 per cent of February/March fall, open interest on Comex has barely recovered at all indicating a reluctance to reinstate long positions despite the uptrend.

Positive backdrop

This could prove to be a positive backdrop for the yellow metal. If gold remains supported at well above $668, the immediate price objective would be in the $688/693 area. Therefore, buying on dips is recommended.

In the medium-term, the metal would trade within choppy ranges that would eventually give way to the topside in the months ahead, above $695/oz.

Base metals: Market fundamentals of the complex continue to look positive on the back of positive demand in the seasonally strongest second quarter, supply-side disruptions and the downtrend in LME inventories.

Copper was a big mover last week, up by close to 5 percent over the week to $ 7,753 a tonne. This happened on the back of strong Chinese unwrought copper imports for March and further declines in LME stocks. Nickel dropped 6.3 per cent over the week, although remaining at a very high level at $48,875/t.

Mixed data

The economic data released on Friday were mixed. Rising euro zone industrial production confirmed the strength in the European economy of late, while US core producer prices had a smaller-than-anticipated increase in March which prompted a sell-off in the dollar against most major currencies and increases in metals prices.

The downturn in North American metals demand in late 2006 and early 2007 resulted in an easing of physical availability of copper, aluminium and zinc. This weakness was reflected in an easing of the physical premiums for these metals. Lead and nickel markets that had been supply-constrained throughout this period did not see any such deterioration in premiums.

US demand

According to experts, over the past two months, there have been signs that the premiums for copper have been picking up as phenomenally strong demand from China has tightened up physical availability despite weakness in the US demand.

On current reckoning, technical analysts are not too sanguine about copper price prospects from the current level and believe that the uptrend may be exhausted.

In the near-term, the rally looks over-stretched, they assert. Into the week, $8,040 and $8,125 are likely to be a sticking point.

In the medium-term, however, the chart looks bullish. The market will ultimately retest and likely to exceed its 2006 peak near $8,800.

A constructive IEA report last Thursday added to the extremely bullish set of weekly US data earlier in the week, helping prices to resume their upward trend.

Crude

The IEA continues to trace an overall constructive picture for the balances of the oil market, projecting a call on OPEC oil and stocks for 2007 some 0.3 million barrels a day above current OPEC production levels.

Adding to the positive picture is the development in the inventory situation, with OECD inventories seen falling by a massive 80.5 million barrels in February (at the rate of nearly 3 md/d) and preliminary data for March indicating a further drop of 23 mb.

All this suggests that this year's total first quarter OECD inventories are on track to fall by around 1 million barrels a day, the highest rate of decline since first quarter of 2006. This provides evidence that the market is continuing to tighten at a fast pace, experts have asserted.

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