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Firm tone in gold likely to continue

G. Chandrashekhar

MUMBAI, July 1

GOLD was generally strong last week eventhough the market showed two-way movement reaching a high of $278 per ounce and low of $268/oz. Despite profit-taking and some not-so-positive news, a firm undertone ensured an eventual bounce-back in prices.

Official price on Friday was $270.60/oz (London PM fix), down one per cent from previous week's close of $273.30/oz. Silver looked lower.

Gold was sold-off aggressively following the US Federal Reserve's decision to lower US interest rates by 0.25 per cent rather than 0.50 per cent as widely anticipated.

``The market has been net long for some time and the prospect of lower rates was an important factor in such a position as it would have led to a further narrowing of the gold contango ($LIBOR minus the lease rate), the potential for inflationary pressur e and the possibility of a weaker dollar,'' commented Mr Kamal Naqvi, analyst with Macquarie Research Equities.

The 25 basis cut has not been enough to outweigh the easing in gold lease rates (one-month down to 1.31 per cent and the one-month contango rose to 2.33 per cent on Thursday). In addition, the US Federal Reserve is taking the prospect of higher inflation seriously and the dollar strengthened.

``The firmer tone in gold is likely to remain, but this only justifies a higher (i.e. current) trading range and not a bull rally,'' Mr Naqvi said.

Silver made only modest gains on the earlier strength of the yellow metal and quickly fell back on the sell-off. It ended the week unchanged at $4.34/oz London AM fix.

Both platinum and palladium suffered from the wave of selling of industrial metals. On Thursday, palladium fell to $590/oz, its lowest level since June 2, 2000, while platinum held cautiously around $560/oz. Platinum ended the week at $558/oz, down 2.8 p er cent week-on-week, while palladium shed 1.8 per cent to close at $602/oz.