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G. Chandrashekhar

Mumbai, Nov. 11 With key price determinants of gold remaining positive, as expected, gold moved vertically to breach the psychological $840-an-ounce level last week; and continued to stay put at robustly high levels. The metal took direction from the oil market and the Euro/Dollar, and once again reaffirmed its status as a safe-haven investment.

On Thursday, in London the PM Fix was $841.10/oz, but declined to $831.50/oz the following day. Silver followed suit to shed some price, having moved down from $15.36 (Thursday AM Fix) to $ 15.15/oz (Friday AM Fix).

How long will gold prices stay high? Producers continue to take a positive view of price prospects. The global hedge-book is much smaller today; but there have been a number of large buybacks this year.

Foreign exchange strategists believe the dollar will continue to weaken. The expectation of downside risks to growth and upside risks to inflation would prove supportive.

The financial markets need a close watch. The strong physical demand at every price dip provides a solid footing to prices.

Caution is needed in that the speculative length in gold is high which creates the possibility of a short-term price correction. There is strong medium-term uptrend for the yellow metal.

According to technical analysts, consolidation above $822/23 keeps gold on track to test $850 (all-time high), then $875.

As yet, there is no clear sign that profit-taking has begun, they assert. What will trigger profit-taking is something everyone is thinking about. In the medium term, the metal could test the all-time high and thereafter, $1,000 in 2008.

In the domestic market, demand compression following the strident price rise is evident. Festival sales have been muted.

The sharp price rise has taken most buyers by surprise. Many believe the current period is more for speculative buyers rather than for physical purchases for, say, household use.

The latest OECD composite lead indicators data suggest that growth could slowdown in major OECD economies. Even China may not be able to fully neutralise the impact despite forecast of accelerated growth. This should be a matter of concern for the metals sector as there always is a positive correlation between global economic growth and metals consumption.

Last week, copper fell by about 5.9 per cent over the week; lead prices, too, declined, in response to recent sustained increase in inventory. Tin prices are seen consolidating and are expected to push higher on supportive fundamentals. Nickel prices have begun to rally because physical demand is starting to pick up in the wake of a rebound in stainless steel production.

Global nickel consumption in 2008 may increase by 10 per cent.

Notwithstanding OECD numbers, and the possibility of a short-term weakness in some metals like copper, market participants view the risks to prices to be on the upside. Even if the US were to face a slowdown, consumption in other parts of the world, especially Asia, is likely to stay robust. As supplies struggle to meet demand and inventories stay low, the market can only grow stronger moving into 2008.

The demand-supply fundamentals are tight. There seems little respite from high prices. The latest World Energy Outlook published by International Energy Agency has merely served to caution the world about the impending energy crunch.

As oil edges inexorably towards $100 a barrel, observers try to find factors outside of the fundamentals. There is allegation that speculators are driving the market up. It is argued that hedge funds are targeting oil in order to make-up for losses in other markets.

Now, interestingly, experts point out, based on CFTC data, that the share of non-commercial positions in total NYMEX crude and product futures contracts is just below 9 per cent, levels broadly unchanged since early-July. In fact, at no time has speculative interest in the market totalled more than 10 per cent, it is pointed out.

In other words, the worsening fundamentals are for real. Again, to what extent the current high prices will destroy demand is still a matter of conjecture.

More Stories on : Gold & Silver | Outlook | Commodity Markets

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