Correction Likely For Gold In The Near Term

Mumbai: After hitting multi-year highs, gold prices have started to recede towards support levels below the psychological $800 an ounce on cue from dollar movement and crude market. In London cash market, gold PM Fix Friday last was $783.50/oz, down from $794.50/oz the previous day. Silver too followed suit with Friday AM fix at $14.23/oz ($14.38/oz).

Going forward, despite the recent southward movement, the medium-term outlook for gold is positive as key price determinants remain supportive. Dollar weakness, inflation fears, credit market concerns and possibility of a slowdown in the US economy all combine to divert investor interest to the yellow metal, known for its safe haven status.

However, in the near term, there is the possibility of a further correction towards $760-770 levels. The speculative long position is still considerable and there will be profit booking. Buying at dips would be a sensible investment policy for the time being. Price correction is expected to generate physical demand in large markets such as India.

According to technical analysts, gold is seen slipping towards its critical support level in the 773/767 zone. A period of near-term range-trading may be witnessed and there would be choppy two-way flow. Price would over time resolve to the topside for a move towards 850. Consolidation above 745 implies a test of the all-time high and thereafter even higher in 2008, chartists assert.

Base metals: In the international market, with the exception of aluminium, the base metals complex ended last week on a high, recovering from a heavy sell-off over the previous month. Copper rose 4.2 per cent week on week following an over 10,000-tonne decline in Shanghai exchange inventory, while zinc surged by 13.3 per cent during the week, driven by short covering and reports of China considering tax changes.

Nickel fell by 7.2 per cent over the week following heavy selling pressure. Stainless steel producers have continued to de-stock and physical supply has increased. LME stocks are rising. As destocking continues, consumers working with limited inventory will have to return to the market early next year.

Nickel prices are expected to rebound, especially with expectation of a pick-up in stainless steel production.

Right across the sector, far forward prices are holding up well. Recently, both aluminium and copper 63-month forward prices hit fresh all-time highs.

This suggests market participants see recent price weakness as a temporary feature. There is expectation that even if the US economy was to slow down, supplies will still struggle to keep up because of growth in other parts of the world, especially Asia.

Inventory levels will stay low and in a number of markets including copper, nickel and tin, inventory levels in early 2008 are forecast to fall to fresh lows in the current cycle. In the short term, however, there is potential for price weakness in copper, lead and nickel.

According to technical analysts, copper faces the risk of making further gains, but the price advance will be choppy. On the other hand, aluminium looks vulnerable. Against the near-term resistance at 2530/60, there is expectation the market will drift towards the larger range base near 2374/2410, they said.

Crude: Energy market continues to play a key role in setting the direction for commodity markets in general. Evidence of further tightening of crude oil market is mounting. OECD stocks have deteriorated. The global market is far from a state of equilibrium. Even if OPEC decides to raise production further in December (over and above the 500,000 barrels a day since November), the effect of the increase is not likely to be felt until well into 2008 Q1. Even though the market is showing some signs of easing, it may be premature to conclude that the bull run has ended.