The Hindu Business Line : Further drop likely in gold as dollar looks to gain strength

Chennai, Aug. 10 The weekend witnessed a crash in commodities as the dollar gained strength. The greenback that has been gaining strength has got nothing to do with any bright outlook of the US economy.

In contrast, the gloom is now expected to spread to other countries and, therefore, their currencies are now set to take a hit. That, in turn, has begun to lift the dollar.

In fact, during the weekend, the dollar climbed to two-month high against the euro. The euro was quoted at 1.5013 against the dollar, down from the record 1.6040, a few weeks ago.

The dollar also climbed to a seven-month high against the yen. And the dollar’s cause was helped to a great extent by the negative picture painted about the euro zone’s economy.

As a result of the dollar’s gain, gold closed at $857 an ounce. That means, it has breached a crucial support level of $862 and it looks likely that the yellow metal could now slip towards $800, in case it falls below $850.

Deepening slowdown

What has happened in view of the crash is that there is hardly anyone who is positive about the commodities prospects in the near term.

Analysts are of the view that the current slowdown in commodities could last up to six months and, in extreme cases, even more. This is because they feel the global economic slowdown has deepened.

Nothing can be better illustrated by the fall in crude prices, which has declined nearly 20 per cent since it hit a peak of $147 a barrel on July 11. Surely, crude was one which has been driving gold in the recent past and its fall doesn’t augur well for the yellow metal.

What has to be taken into account is that gold has tended to decline despite reports of decline in production in South Africa. The labour unrest in that country, which is also affecting the production, has been ignored by the precious metals market.

The market is yet to see any significant improvement in physical demand and investors are now seen keeping away for sometime to come. In fact, technical indicators point out first resistance at $885 and past that, there could be resistance in the $891-909 range.

According to Angel Commodities, the yellow metal could fall to $800 and faces resistance around $895 an ounce.

It also sees gold under considerable pressure as the dollar is seen gaining strongly in the coming months. In the domestic futures, Angel sees support for MCX October contracts at Rs 11,850-11,650 and resistance at Rs 12,015-12,250 for 10 gm.

Crude

Though crude could find some support in the supply disruption at Turkey’s refinery, the gain could be capped. However, $110 a barrel could be a crucial support for crude. Angel Commodities sees support for crude in the $112-116 band, whilst resistance at $122-125 range.

Metals

The trend is bearish for copper in the short-term, though it could stand to gain a lot in the long-term.

Aluminium could receive support on fears over a cut in production by smelters in China. Zinc could face pressure on reports that producers are facing losses at current price levels. In all, according to Angel Commodities, the base metals complex could be volatile this week.

There could be still one key to revival of the commodities counter.

That is, if the US comes out of its ailing economy and if China shows the expected appetite for coal, crude and metals even after the Olympics gets over.

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