The Hindu Business Line : Gold's upside potential intact

Outlook
Gold can correct lower to the high $650s without dampening the upward trend prices.
Stagnant OPEC production is highly supportive of higher oil prices.

Mumbai May 13 Gold prices came in for some heavy correction towards the end of last week following fund liquidation amid a very large net long speculative position built up in recent months.

But the metal managed to recover some lost ground eventually in line with depreciation of the dollar.

The London PM Fix for Friday was $ 669.00, down from $ 673.50 the previous day. Silver followed suit with London AM Fix at $ 13.04 ($ 13.29).

Heavy selling

The $15/oz decline in London and New York trading hours combined with the weakness in the Yen encouraged heavy selling causing April TOCOM gold futures to fall by their full 60 yen/gram limit in Asian trading hours on Thursday, explained an expert.

The big price fall encouraged some physical buying, helping prices to recoup on Friday some of their losses. The price correction was not entirely unexpected. This is seen as a prelude to another move up, eventually to over $700/oz.

The market has so far failed to decisively break the psychological barrier; and every move up has resulted in some profit taking. But that's in the very nature of this market.

Dollar weakness

The big picture is still intact. There is potential for dollar weakness, crude oil prices are threatening to strengthen and geopolitical concerns have not waned. These set a strong baseline for further gains.

In the short-term, whether the market would fall from the current levels will of course depend on whether or not more profit taking will occur. Technical analysts are of the opinion that the gold market still looks weak and that prices can correct lower to the high $650s without dampening the upward trend prices. In the short-term, 665/668 is seen as a support zone.

In the absence of a break below 657/59, the market may carve a base this week; and thereafter, the medium-term uptrend should swing back in favour of a more aggressive test of 695 and higher.

The big news towards last week was the launch of Zurich Cantonal Bank's precious metals ETFs (Exchange Traded Fund).

Bullish path

Crude: The oil market is likely to continue to tread a bullish path, as per the latest Oil Market Report. The release by International Energy Agency (IEA) has revised downward baseline figures for oil demand in 2006 and 2007 by roughly 100,000 barrel per day (bpd), but has downwardly adjusted its non-OPEC supply growth to 1.0 million bpd from 1.1 mbpd. The call on OPEC oil and stocks for 2007 has increased by 100,000 bpd to reach 30.5 mbpd which continues to remain above current OPEC production levels (placed at 30.3 mbpd for April).

The figure of 30.5 mbpd represents a conservative estimate or more precisely the lower bound of a forecast spanning between 30.5 and 31.7 mbpd, experts have quoted IEA as saying.

In other words, current OPEC production levels might be as much as 1.3 mbpd short of that actually required to keep the market in balance over the course of the year.

The combination of projected robust growth in demand for oil, trimmed growth of non-OPEC supplies, declining OECD inventories and stagnant OPEC production is highly supportive of higher oil prices.

Bearish for nickel

Base metals prices rebounded across the complex Friday last although prices remained down for the week, with copper leading the way (decline of 5 percent) on reported long liquidation, weaker Chinese demand and reduced concerns about supply.

Copper prices dropped to a low of $7,760/t on profit taking. Technical strategists perceive the movement as early signs of a deeper correction developing; but assert that the pullback is healthy for a test of $8,525/t, and then $8,800/t in the medium term.

The outlook for nickel market is bearish based on the outlook for stainless steel market for this year's second quarter and the second half. Nickel demand is projected to fall in most European countries. In 2007, the metal is likely to be in surplus of over 60,000 tonnes, with production forecast at 1.48 million tonnes and consumption at 1.41 mt.