The Hindu Business Line : Gold prices get support from weak dollar

Bullish Outlook
Every dip may be viewed as a tactical buying opportunity.
Technical analysts say that the market will break out of its sluggishness and price volatility will rise in the short to medium term.

G. Chandrashekhar

Mumbai, Aug. 26 Along with a bounce back in global equity prices, the metals market too saw prices rebounding. Gold was up by $10 an ounce to trade at $667.4/668.0, ably supported by a weak dollar.

Although the metal’s underlying market fundamentals remain unchanged, in the short run, the price direction is likely to be set by the broader financial market sentiment and Euro/US dollar movements.

Market Drivers

From a fundamental angle, fabrication demand has continued to recover. Consumers are getting used to higher prices, but are averse to volatility. Market drivers such as crude oil price strength and dollar weakness coupled with uncertain global geopolitical environment are supportive. However, de-hedging is expected to be considerably lower in the second half of 2007 while shortfall in the estimated sales of European Central Bank is unlikely to be large. Overall, gold is poised to rise to higher levels; but is in need of a trigger. The last few months have seen the challenge to breach $700/oz unsuccessful.

As fundamentals suggest a strong upside, every dip may be viewed as a tactical buying opportunity. Technical analysts are of the firm view that the market will break out of its sluggishness and price volatility will rise in the short to medium term.

“A move outside of 632 to 695 range would imply another 100 dollars this year,” according to an analyst. Gold remains well supported above 653. The first minor bullish signal to look for is a closing break of trendline resistance at 668, which should herald a run at the 695 swing target. There still are higher highs to come.

Base metals: Although concerns over the wider financial markets continue to linger, an environment characterised by low inventories and supply side disruptions should provide support to the base metals complex, especially once the seas onally slow summer period ends.

Lead, for instance, gained by as much as 12.9 per cent last week, trading above zinc for the first time since 1980, having already overtaken aluminium prices earlier this year. For short-term directional trading, experts see zinc, tin and lead as the base metals with best upside potential; while nickel has the clearest downside risk.

Copper and aluminium are weighed down by soft summer demand and some hefty LME inventory increases. Lead fundamentals remain strong with significant production losses hampering supply growth and the downtrend in LME stocks.

Meanwhile, zinc market fundamentals are also tightening and LME stocks continue to fall. Strong demand and tightening short-term physical supply still support a potential sharp spike higher. Stainless steel destocking has weakened the nickel market, boosting LME nickel stocks.

There is a further downside risk to prices, before the potential for a price recovery emerges in fourth quarter. According to chartists, short-term signs are increasingly turning positive as aluminium is pushing above its previous range low 2550.

A close above 2570 would point to 2660 ahead of potential topping signs later this week. Thereafter, the bear trend from the July high is likely to resume. One can expect the test of the wider range low at 2405 into next months, analysts assert.

Related Stories:
Gold to take lead from financial markets
Bullishness intact in gold