The Hindu Business Line : Key factors may drive gold to fresh 28-year highs

Mumbai, Dec. 9 Gold continues to dance to the tunes of the US dollar and crude market. The dollar itself is subject to influences of US economic data. No wonder, the gold market has been on a seesaw ride for the past few days, with talks of interest rate cut and inflation concern, not to mention varying expectations from economic data.

With these uncertainties investors continue to support the yellow metal. However, at higher price levels (read above $800 an ounce) there is profit-taking for sure.

Weak Currency

In London on Friday, gold PM Fix was $792.50/oz, down from the previous days’ $801.50/oz. Silver, however, bucked the trend. Friday AM Fix at $14.44/oz was higher than the previous days’ $14.06/oz.

Gold market’s future movements are likely to depend almost entirely on the US dollar, with a weak currency helping to push gold prices higher. The key price determinants — Euro/USD, crude market, geo-political environment, credit market concerns — all continue to stay positive for gold with potential to drive prices to fresh 28-year highs.

High speculative length would also mean potential for short-term correction; but in the medium-term, a strong uptrend is seen. Technical analysts see gold trading sideways at higher levels.

Base metals: The entire complex is suffering from negative sentiment — rising inventories in some cases and a lacklustre physical market. The latest OECD leading indicator showed a decline in October, the fourth consecutive month of decline.

Across the OECD economies, there are apprehensions of a broad-based deterioration in growth. The question whether the forecast strength in Chinese growth would fully offset the poor growth prospects elsewhere is at the top of market concerns.

There is, however, a silver lining the market participants see. Right across the sector, far forward prices are holding up well. This would suggest that the recent price weakness could be a temporary one.

It also indicates overall market expectation that demand will continue to stay robust amid supply uncertainties. Even if the US metals demand were to slow, consumption in other parts of the world would stay strong.

Experts assert that inventory levels will stay low and in a number of markets including copper and tin, inventory levels in early 2008 are forecast to fall to fresh lows in the current cycle. In the short-term, copper, lead and nickel prices may fall further, while zinc prices could fall if Chinese producers start to export the sizeable inventories built up.

Crude: Demand-supply fundamentals continue to tighten. OPECs decision to keep production unchanged at current levels has got market participants worried because the growth potential from non-OPEC sources is rather limited. Demand continues to stay robust even at high prices, especially in non-OECD countries. Crude oil prices have the potential to rebound strongly.

Investors should position for potential price upside in the first quarter of 2008.

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