The Hindu Business Line : Bullish sentiment seen fading in gold

Where has the bullish sentiment in the gold market gone? It was not long ago that people were talking about an imminent breach of the psychological level of $600 an ounce. The optimism on prices has perhaps been replaced with indecisiveness as is evident from a more sideways movement for last several weeks.

Even seemingly bullish news evokes muted response. Strength of other precious metals has left gold untouched. The market hardly moved on news of supply cut, for instance, when the German Bundesbank recently announced it would not sell gold in the current year under the 2004 agreement among European central banks.

European central banks sales have slowed since January. In last six months (since end-September) less than 200 tonnes of gold (representing less than 40 per cent of the annual agreed sale of 500 tonnes) have been sold. For the 5-year period (beginning September 2004 onwards) total sales agreed to are 2,500 tonnes.

Experts see these recent events as not signalling a change in European central banks' sales policy, but interpret that high prices may have induced some degree of caution. It is possible that the banks are taking a trading view leading to deferred sales (to future years) if further price appreciations are anticipated.

The sum of completed sales and `announced sales' (excluding Germany) still falls short of the full 2,500 tonnes by around 1,244 tonnes or 50 per cent.

Therefore, Bundesbank's future sales decision will remain pivotal.

At the same time, at every dip in price there is evidence of buying interest. No wonder, the market looks well supported at around $545/oz and is largely seen as consolidating.

Range-bound trade looks likely to continue for some time, though there is the potential for prices to break on the upside after the current consolidation phase.

An additional factor to support this is the reduction in fund length which has placed the market in a better position to move higher.

Oil market - which does impact the yellow metal - is also being closely watched by investors. Further likelihood of future moves in Fed fund rates is also a matter of interest. It is obvious, gold's movement these days has less to do with demand-supply fundamentals, but more to do with non-fundamental factors.

Silver, too, is feeling the heat of profit taking with prices shedding some value after steep increases. Demand from India is likely to slacken not only because of high prices but also government sales resulting in lowering of internal prices. Prices could correct down further in the absence of physical demand particularly because the speculative length in the market is quite sizeable now.