The Hindu Business Line : Gold likely to trade in a range until new trigger

Gold continued to display correction, with speculative longs liquidating their position amid strengthening dollar. On Friday, in the London cash market, the yellow metal’s PM Fix was $789.50 an ounce, down $20 from the previous day’s Fix of $809.00/oz. Silver followed suit, down to $14.01/oz (Friday AM Fix) versus $14.61/oz the previous day. Such price movement was obviously not unexpected.

Key Determinants

Until the market perceives a new trigger, gold is likely to trade in a range — mostly around the psychological $800/oz +/- $20. It must, however, be mentioned that the key price determinants for gold continue to remain positive.

Gold is unlike other commodities. Strong crude prices, broader financial market concerns and economic slowdown all support an upward thrust for the precious metal, which will continue to tag its fortunes with the US dollar.

The rise in prices and the charge towards $850/oz is unlikely to be smooth. Along the rise in prices, occasional long liquidation and profit taking will lead to correction from time-to-time. But the strong medium-term uptrend for gold is something most analysts seem to be convinced about, given the dollar’s potential to weaken over time.

According to technical analysts, gold is mired in a contracting range between 782 and 827. In the short-term, the dip below 791 and oscillations suggest that the range will be in play longer than expected. A move into 777/782 in the coming days is likely. A break of 827 would suggest a resumption of uptrend to 850 and higher.

Base metals: In an appalling week, all the metals fell on expectations of weaker global economic growth.

Price action in the base metals market continues to be choppy because of concerns relating to financial markets, housing market and the US economic slowdown. Lead prices fell by 6.2 per cent over the week, while copper was down by 5.4 per cent. Despite the fall, the fundamentals picture of both the metals looks positive going forward. Nickel fundamentals look weak with rising inventory. For the base metals sector, the silver lining seems to be the announcement of a concerted central bank initiative to improver liquidity.

The far forward prices are holding up very well. This shows, despite recent price weakness, market participants are positive about price performance, going forward. In a number of markets including copper, nickel and tin, inventory levels in early 2008 are forecast to fall to fresh lows in the current cycle.

According to technical analysts, copper may face further declines from the current levels.

Crude: Despite the general worsening of the macroeconomic environment, there is expectation of continued strong demand growth in 2008. IEA has forecast oil demand growth in 2008 at 2 million barrels a day.

The first quarter of the New Year may witness further market tightening under normal weather conditions, even as OECD stocks are trending down. According to experts, fundamental developments point to further upside potential for prices.

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