Immediate upside potential appears limited

G. Chandrashekhar

Mumbai, Sept. 8

Gold's gyrations never cease. After making sharp gains earlier in the week, prices fell - slightly on Wednesday and significantly on Thursday. The mood remained subdued in the early trades in London on Friday with the yellow metal trading a shade lower than $614 an ounce in the forenoon. The price fall is directly attributable to strengthening of the US dollar.

Driven by renewed concerns over the inflation outlook in the US, expectations of a firmer dollar have grown. The recent release of a series of US economic data proved dollar-positive.

Whether the Fed's tightening cycle is over or not as yet is still a big question. Inflation worries appear real, though. Again, how long the dollar will continue to hold on to its current strength is a matter of debate. Although, the overall macro-economic factors are likely to turn positive for gold over the next few months, in the short term, the metal could find itself under pressure, unless it is helped by sudden bullish developments such as say, relating to geopolitics.

Buying Interest

What are the reasons for poor price performance of gold so far? Physical demand has remained rather weak so far this year. Although it is expected that buying interest might revive in the coming weeks helped by lower volatility and high seasonal demand in such markets as India the potential for a sharp deceleration in companies de-hedging activity should provide an offsetting factor, analysts asserted.

The European Central Bank sales, till the end of the month, is another bearish factor. Sales of the agreed 500 tonnes for 2005-06 are not complete as yet; and fulfilment of the agreed target would mean improved physical availability. Market participants are unlikely to build large positions until central bank sales are completed. Therefore, the immediate upside potential for gold appears rather limited.

(This article was published in the Business Line print edition dated September 9, 2006)
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