The Hindu Business Line : Short-term weakness persists in gold

Chennai, May 4 Last week gold fell below $850 an ounce-mark to a four-month low, but it recovered marginally to end a little higher. While spot gold closed at $855.60/856.40, June contract ended at $858. The recovery in dollar, rising crude prices and US jobs data, which saw the number of pink slips given at 20,000 — much lower than market expectations of 80,000 — all had a sobering effect on the yellow metal.

Charts still show a short-term weakness in gold. Low physical demand on the fundamental side is also having a telling effect on the precious metal. The bearish undertone is very much evident from the liquidation by funds in almost all markets. On the other hand, the trade volumes are thin.

Long positions

One important indicator of this liquidation is that commercial hedgers’ open interest position in gold has declined below 70 per cent of the overall long positions to 68 per cent. Again, large speculators’ open interest position in non-commercial hedges is also down. The indications are that investment funds are liquidating their long positions in the precious metals markets or possibly indulging in short-selling.

Standard Banks sees some downside potential for precious metals, as investors await further direction from financial markets. Though gold has gained $5 since hitting the four-month low, the prospects do not seem bright. On the upper side, technically, gold faces resistance at $859.1 and if it scales that, then it has another hurdle at $870.5. On the downside, gold can expect some support at $842.7 and below that there can be some support at $837.6. The problem with gold is that all bull news have been discounted and currently there is nothing to propel it forward. This is despite GFMS maintaining that gold is likely to scale $1,000-an-ounce again.

Overall, the lower demand for jewellery, in the face of higher price for the yellow metal, has dented the market psychologically. It will take time for the yellow metal to recover. However, there is one event that is being keenly looked at by the global markets.

With the Indian wedding season round the corner, and prices off their lows, hopes are that the Indian market can provide some support to physical demand, especially that of jewellery. If that happens, then there could be some sparkle for the precious metal. Also helping the purchase would be better liquidity in view of arrivals of the kharif crops. Silver is likely to toe gold and, therefore, its fortunes are tied to gold. Meanwhile, Angel Broking, in its outlook for metals, said the Chilean strike in Codelco is expected to continue, as there has been no intimation by the Chilean Government to take a strong call to end the strike.

This is adding a big support to copper prices. Though its prices could have declined due to sentiments being mixed about the US economic condition, falling copper inventories on the LME, coupled with tight demand-supply situation, have provided support. Inventories are expected to fall further as copper supplies are tight. But prices are susceptible to short-term corrections. Tin prices are consolidating as the commodity has touched its peak. Supply tightness and falling tin inventories on the LME are pushing prices higher. “We expect that tin prices could consolidate further. However, fundamental support will ensure higher prices as there is a huge demand-supply gap. However, the short-term price corrections are inevitable in times of uncertainty regarding economic situation in the US. This will affect all base metal prices," Angel Broking said.

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