Date:11/09/2006 URL: http://www.thehindubusinessline.com/2006/09/11/stories/2006091100430700.htm

Back Gold market could remain in cautious mood

G. Chandrashekar

Copper fundamentals likely to get tighter in Q4, support prices

Mumbai , Sept. 10

Triggered by a rally in the dollar, a bout of long liquidation saw gold plummet to recent lows in the latter half of last week.

In the near-term, market is expected to maintain a mood of caution. Few participants are likely to buy aggressively into the market as risks to the downside remain.

While there is consensus on the downside risk, some experts view these risks as `fairly high'.

The price correction in gold rubbed off on other precious metals such as platinum and palladium, too, which fell heavily.

More inflow likely

Two sets of factors, in particular, must stem investor sentiment towards gold in the next few weeks. Firstly, the risk associated with the presence of central bank selling through the remainder of the current Central Bank Gold Agreement sales year (ending September 26).

So far, sales have amounted to around 345 tonnes compared with the target sales of 500 tonnes maximum.

In other words, there is the potential for the entry of another 155 tonnes gold into the market over the next 15 days. This should keep investors wary of taking up large positions in the yellow metal.

Dollar factor

The second factor relates to currency. The recent rebound in the dollar against the major European currencies suggests that a downward correction in the dollar might take longer than previously expected. For the gold market, it is no good news. The upbeat short-term outlook for the dollar will curb the bullish sentiment in the precious metal.

In addition, is the weaker global demand for the metal. Physical gold sales have been disappointing due to high and volatile prices. Whether seasonal factors (for instance, festival/marriage season in India) will help support the market remains to be seen. Large speculators continue to carry a moderately large net long position.

Broad picture

Gold prices could, therefore, be expected to continue to move sideways amid their recent ranges. Quite obviously, caution is recommended. From a technical viewpoint, the sharp reversal below the 632 trendline warns of renewed range trading and likely to test 609-602 support in the sessions ahead, a London-based analyst asserted.

It must, however, be stated that the broad picture for gold remains fairly positive. Macro-economic developments, including renewed inflation concerns could become supportive. There is potential for further upside following a period of choppy ranges.

Copper has from time to time managed to breach the psychological $8,000 a tonne. It is widely believed that the underlying market fundamentals are likely to get tighter as the fourth quarter approaches and provide support to prices.

Stocks at Asian warehouses face drawdowns. The threat of strikes or labour action in some of the mines creating supply-related uncertainty is weighing on the market.

The latest OECD area composite leading indicator (CLI) in July edged lower for the second consecutive month to 109.5 from 109.8 in June. On a six-month rate of change basis, the CLI for OECD as well as for EU-15, the US and Japan all posted falls.

The OECD said that the latest data for major OECD non-member economies point to a slightly weakening outlook for China and steady expansion in India, Russia and Brazil.