The Hindu Business Line : Gold looks vulnerable; copper, aluminium firm up

Gold statistics
Wedding season and Diwali in India are sure to spur sales
In the long-term dollar might depreciate and gold prices could zoom up 10-12%
Risks to the downside cannot be ruled out

Mumbai , Sept. 24

A broad positive sentiment towards metals helped gold recover some ground late last week. Prices picked up a little on Friday to $587.70 - $588.70 an ounce, from $582.30 - $583.30 at Thursday's New York close. In other words, the market has now moved to the top of the recent trading range of $571-588/oz. Declining US dollar broadly provided a boost to the yellow metal.

There seem to be emerging concerns over a slowdown in US economic activity, largely based on evidence of weakness in the housing market. Importantly, reports of a pick up in Indian demand in the wake of festival season and beginning of crop harvest helped the sentiment. Recent price fall surely sent a large number of buyers hunting for gold, bringing out rather clearly the price sensitivity of Indian consumers and price elasticity of demand in the Indian market.

But to what extent physical demand will sustain if and when prices begin to firm up is debatable. As soon as prices show signs of rising, scrap sales could show up. Wedding season and Diwali in India are sure to spur sales; but it is doubtful if Indian demand alone can pull the precious metal above $600/oz and sustain it. Stronger factors are required to reverse the fragile sentiment.

Foreign exchange strategists are coming around to the view that the dollar could decline from the current levels. Should that expectation materialise, it would surely benefit gold as it would boost confidence of investors and attract them. Yet, look at the flip side.

Downside Risks

The sentiment is still fragile; oil prices remain weak; and even the fundamentals are slackening. In the first half, jewellery demand was down substantially because of strong and volatile prices. Therefore, risks to the downside cannot be ruled out for the present. It is advisable to buy on dips.

However, longer-term, say towards year-end, there is consensus that the dollar might depreciate and gold prices could zoom up 10-12 per cent from current levels.

Both copper and aluminium firmed up last week as inventories in exchanges were drawndown. There are also concerns of labour action. Although fundamentals are strong, caution is necessary as the market is now groping for direction.

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