Support seen from currency factor, uncertainty over Iran issue

G. Chandrashekhar

Prospects


High inflation

could positive for gold.

Possibility of

a more sustained recovery in sessions in copper.

Oil market

could be further tightening fast.

MumbaiMarch 18Gold had failed to benefit in recent times from a flight to quality amid equity market volatility. A high inflation print could be negative for the dollar and in turn positive for gold. Suddenly a host of factors supportive of gold have emerged.

Currency factor

Following stronger than expected US inflation data and depreciation of the dollar/euro exchange rate, gold continued to climb. On Friday, the London PM fix was $653.20 an ounce.

If the dollar weakness is sustained - and there is reason to believe it would, given firming oil prices - then the currency factor plus the uncertainty over the resolution of Iranian issue could provide support for gold to move higher.

In addition, China's central bank announced on Friday that it would gradually relax controls over the import and export of gold, thereby allow more foreign access to domestic futures market.

It would also allow foreign banks to participate in gold trading on the Shanghai gold exchange, which currently trades only spot gold.

Exporting gold bars from China is currently not permitted; and only four State-owned banks are allowed to import gold bars. The Government has also called for China to develop gold derivatives.

Potential to gain

Given the combination of factors - inflation, currency, geopolitics - experts see an upside to the yellow metal from the current levels. There is potential for the metal to gain $20-25 an ounce.

Base metals

: As the market enters seasonally strong second quarter, base metals prices have begun to rally amid firming market fundamentals.

Stronger-than-expected US industrial production data for February indicated that the US economy remained resilient despite slowdown in the housing market. Chinese bullish production data also perked up the market. China's metals demand is booming.

Star performers

Copper and nickel have been star performers, with the latter setting yet another all-time high on Friday. LME cash price for nickel registered $50,875 a tonne, while copper was quoted at $6,675/t. LME inventory flows continue to reflect stock drawdowns for all base metals except zinc.

Nickel prices are rallying on the back of strong stainless steel demand, supply disruptions and critically low LME inventory.

According to technical analysts, copper appears to be poised to test an upside from the current levels. The bullish consolidation of last week gave way to the topside as market surged above $6,375/6,410 resistance area.

The possibility of a more sustained recovery in sessions ahead appears real.

The trendline resistance would be near $7,125, although the recovery may not be in a straight line.

As for the medium term outlook, chartists believe, the strong move lower from the May 2006 peak has sparked a large corrective range-trading phase between $5,000 and $7,500.

Crude oil scenario

Rising macro-economic concerns seem to have dented the sentiment last week, weighing on prices despite a supportive set of data releases.

According to the latest oil market report of the OPEC secretariat, demand for OPEC crude is currently expected to average some 30.4 million barrels a day in 2007, or 0.4 mb/d above February's output levels. On the other hand, OECD inventories are falling, despite one of the warmest winters, at their fastest pace in 10 years.

Experts interpret this to suggest that the oil market has already been over-tightened relative to the normal seasonal profile. The oil market could be further tightening fast.

In sum, the dynamics of the fundamentals remain supportive, with further price gains yet to be seen. The geopolitical angle - Iran's insistence on pursuing nuclear technology - also will have to be reckoned with.

(This article was published in the Business Line print edition dated March 19, 2007)
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