Monday, February 1, 2010

Where Gold is Headed, Indian Perspective

Business Line, from The Hindu Perspective comments on the recent gold volatility. The recent cmmnets on bank regulations and the positive outlook for the US dollar have exerted a negative influence on commodity prices. Oil has fallen to less than $75 a barrel and showing signs of stabilising in the low $70s.

"Gold prices have already fallen below $1,100 an ounce with continued long liquidation and less-committed speculators quick to exit. Base metals complex is under pressure too because of uncertainties over the effect of Chinese measure. Favourable crop prospects in the northern hemisphere are seen capping agricultural commodities' upside.

In the short-term, growth signals, gyrations of the US dollar and market fundamentals of specific commodities will determine the price direction. It may be necessary, especially for speculators, to limit exposure to the commodity markets until the effects of recent developments unravel.
Gold: Weaker equity markets and a stronger dollar have weighed upon the entire precious metals complex. With China tightening, the dollar has appreciated against the euro more quickly than expected. For the second month in a row, gold ETPs have witnessed net outflows.

Already under pressure from a firming dollar, expectations of further strengthening are likely to continue to weigh upon the complex. Silver is seen as the most vulnerable as investors continue to liquidate. Foreign exchange strategists are sanguine, the dollar will continue to strengthen until the second quarter or until the time the US Fed begins monetary tightening cycle.

As we have maintained in these columns time and again, it is fickle speculative investor interest that poses the biggest risk to this market. Gold bulls continue to bet on further purchases by central banks. However, on current reckoning, it is at best a hope. So, while the yellow metal's allure will remain intact over the next few months, its glitter may appear to fade somewhat because speculators would exit due to weakening prices.

Physical demand, on the other hand, is far from robust. While consumers may be slowly getting used to high prices, there is nothing to suggest that jewellery demand in terms of volume is picking up markedly. As for India, the saving grace would be weaker international prices.
Base metals: Renewed concerns over growth and China's monetary tightening are exerting pressure on the complex. Long liquidation is now turning into short selling. This suggests there could be further downside to prices.

Lower prices are likely to spur physical activity in base metals, especially in the context of tight scrap supply and low inventories with producers, consumers and distributors. The key question is whether OECD demand will pick up and when. Until the situation in China becomes abundantly clear, market participants are likely to exercise caution".

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