Bullish Fervour In Gold, Energy To Continue

Mumbai: Volatile conditions characterised the gold market last week with heavy intra-day and inter-day movements. From the current level of $800 an ounce, where would the yellow metal go? Most conditions favour a further upward march.

Key determinants

The key price determinants are all in place.

External factors such as stronger euro/USD, buoyant oil prices, and sensitive geopolitical environment coupled with additional catalyst of expectations of slower US growth momentum and ongoing credit concerns have the potential to continue driving prices to fresh 28-year highs, according to experts.

Strong physical and investor demand emerging upon price dips should provide a solid footing for price. However, the speculative length in gold is high which creates the possibility of short-term price correction. Inevitably, there will be profit taking from time to time as the market moves up. That correction in turn would create buying opportunities.

A strong medium-term uptrend for gold is seen. The next price target is $850/oz which may be realised in a months time.

Generates consensus

The recently concluded LBMA meeting in Mumbai, too, generated a consensus among experts about the strong upside potential of the metal, given current concerns and uncertainties.

Gold continues to affirm its status as a safe haven investment and hedge against inflation. However, under Indian conditions, resistance to high prices from genuine consumers is already felt.

The recent price volatility is likely to further deter household buyers. From the current levels, further firmness to the rupee is limited, at least in the short run. That may make rising gold prices less attractive.

Metals vulnerable

Amongst commodities, base metals remain the most vulnerable to bearish views over economic prospects. With renewed concerns over the credit market, this sector is the softest of the commodities complex. Even on the fundamental side, the developments are less encouraging as there are uncertainties in the short-run. European and the US consumers are de-stocking.

Together with rising LME inventories, sluggish Chinese buying in copper is weighing heavily on the market sentiment. Further price losses at the front end of the base metals curves are not ruled out.

Experts have downgraded short-term lead and zinc price targets.

Aluminium, tin robust

Aluminium and tin markets where inventories have fallen recently are performing more robustly, while nickel is relatively stable.

An interesting feature of the base metals market is that far forward prices are holding up well. This suggests market participants see recent price weakness as a temporary feature.

Even if the US were to face a slowdown in demand, consumption in other countries, notably Asia, is expected to be strong. Inventory levels are expected to stay low and in a number of markets including copper, nickel and tin, inventory levels early 2008 are forecast to fall to fresh lows in the current cycle.

All this suggests that further price weakness, if any, would be temporary. Copper, lead and zinc are seen vulnerable. Despite recent price declines, lead fundamentals look tight and there is the potential for a pick up in buying during the strong battery demand season.

Crude seen strong

Very clearly, tightening market fundamentals point to a continued strength in crude prices.

Stocks in major economies (the US, Europe) are deteriorating sharply. Seasonal demand factors and continued Asian consumption strength are contributory factors.

Supplies, despite OPEC’s five lakh barrels a day additional production since the beginning of this month, are insufficient to meet robust consumption requirement.

Contrary to popular belief, the role of non-commercials (speculators) in the crude market is rather limited. Extreme fundamental tightness provides the market with a powerful platform from which to test even higher highs, experts assert.