G Chandrashekhar

Gold uptrend may be intact after wild swing

G. Chandrashekhar Mumbai | Updated on August 29, 2011

Gold dropped the most in a year as some investors sold the metal after signs of slowing growth spurred a rally to a record $1,917.90 an ounce.

Last week was extraordinary is many respects for the global commodity markets. Over the week, all precious metals lost value.

Gold had a dazzling rise to breach $1,900 an ounce, but collapsed dramatically with an unprecedented loss of $200 on a single day following profit-taking ahead of the global bankers' meeting at Jackson Hole.

Interestingly, it recovered some ground in the wake of some positive macro data as well as margin requirement hikes.

Soon after it became clear that there may not be QE3 the base metals complex perked up. Prices of most base metals rose week-on-week. Also unusually, the crude market was relatively calm despite several headlines on the geopolitical front. It appeared the market was more concerned about macroeconomic worries than anything else.

The second read on the US GDP growth confirmed activity was weak in the second quarter, with growth downgraded from an annualized rate of 1.3 per cent to 1 per cent. Partial indicators for Q3 continue to suggest better economic conditions in the current quarter, for instance with durable goods orders coming in firmly for July. Additionally, much stronger orders for motor vehicles reinforce the view that 3Q GDP should get a big boost from the auto sector as supply chain shock dissipate, an expert commented.

So, the global commodity markets continue to grope for direction. Sustained flow of positive macro data alone can change the sentiment. Geopolitics, the dollar dynamics, sovereign debt issues and inflation concerns have receded to the background for the time being. In many cases, the market fundamentals continue to be tight which means as and when the growth sentiment improves, there is potential for a strong price surge. Crude and copper are surely two such commodities. One can add corn and soyabean on the agriculture side.

Gold: The yellow metal's dream-run to cross $1,900/oz and then register a sharp fall of $200/oz in a day's time and a robust recovery soon thereafter took most market participants by surprise. Whether the price decline was as healthy is debatable, but many experts swear by it. There was too much of frenzied trading activity in the metal. To be sure, the uptrend seems to be intact.

On Friday in London, the gold PM Fix was at $1,788/oz gaining 4 per cent from the previous day's $1,729/oz; but over the week the metal shed 3.2 per cent. Keeping pace with gold, silver lost 2.2 per cent over the week. On Friday, the metal's AM Fix was at $41.06/oz, up a healthy 5.3 per cent from the previous day's 39/oz.

World Gold Council has said demand trends are positive. Going forward, the supportive factors for gold have far from dissipated. The insecurity surrounding the state of the global economy amid low interest rates, and return of broad investor interest coupled with central bank swings to the demand side are set to drive gold prices higher, experts aver. Many analysts are now revising their forecast gold prices higher.

According to technical analysts, support in the 38.50/70 area underpins a recovery in silver. Selling interest near 43 will act as cap. The corrective risk for gold may not yet have passed. One may look for initial move towards 1832 before a final leg lower.

Base metals: The entire complex gained in value over last week as base metals shook off the revelation that there is to be no QE3. Lead gained 7.9 per cent and tin 4.4 per cent over the week with much of the gain coming on Friday. Copper 2.9 per cent and zinc 2.5 per cent were the other robust performers. Copper closed above $9,000 a tonne on the LME.

The market is still concerned about macroeconomic uncertainties. Emerging market demand slowdown is another fear gripping the market participants. So, fundamentals have somewhat receded into the background. Sustained flow of positive macro data can bring back some confidence to the market.

According to technical analysts, support in 2300 underpins bullish view for aluminium, targeting the 2450 range highs. As copper closed above 9000, one can look for move toward 9175 and then 9350 and beyond.

Crude: Demand data from the US, China and India suggest a more positive outlook than in Q2. Geopolitical developments have not impacted the market much as growth concerns and in turn demand concerns are at the forefront. No wonder, fundamentals which look constructive have receded into the background.

Published on August 28, 2011

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