The Hindu Business Line : China card leads to gold price spike

Metals watch
The market is seen rebalancing in the short-term as demand growth has slowed.
The heightened price level may lead to profit taking in all the precious metals.

Mumbai , Nov. 12

In a zigzag movement, the entire metals complex displayed divergent trends last week. Precious metals in particular rebounded from the price falls earlier in the week buoyed by a combination of dollar weakness and higher oil prices.

Gold prices closed just off a new two-month high of $630 an ounce amid a buying frenzy of China diversifying its reserves by buying precious metals.

Silver gained 3.4 per cent to close at $13.03/oz, while platinum closed up 2.3 per cent at $1,220/oz. Earlier, China's foreign exchange reserves crossed the milestone of $1 trillion mark.

The sentiment towards the precious metals complex was supported by news reports citing China's Central Bank Governor as saying the country was considering diversifying its foreign exchange reserves.

Diversification

Interestingly, when asked whether diversification plans included gold, he is reported to have said: "That's a separate thing." It is not for the first time that China's Central bank has talked about diversification. Whether gold will figure in the plan is hard to tell at this point of time.

But, clearly, gold bulls seized the opportunity and pushed the market up.

It is likely that at the heightened price level, there would be some profit taking, indeed in all the precious metals. Clearly, choppy times are ahead for gold. Traditionally, November and December are seasonally strong months. So, it is difficult to tell whether the uptrend is over. According to technical analysts, the next price target would be $641/oz.

However, after that the upside potential would be rather limited, in the short term. In the medium term, there are still higher highs to come for the yellow metal.

Choppy ranges may give way to the topside later this year or even into next year. Base metals fell sharply on Friday under heavy fund selling pressure. Copper broke down, 3-month prices falling 5.6 per cent to $6,899 per tonne (US cents 313 per pound), passing through most technical barriers. The market surprised many as prices broke below the key support level of $7,000/tonne and range lows.

The near-term sentiment continues to be weighed by the increase in copper stocks on LME and Shanghai exchange. Zinc was down 4.7 per cent despite another reduction in stock levels, to close at $4,353/tonne (197.5 cents/lb).

Weaker Demand

Aluminium was also hard hit, dropping 5.3 per cent to finish at $2,678.5/tonne (121.5 cents/lb). The falls reflect concerns over recent copper stock increases, reports of weaker western demand and slowing Chinese demand growth. Although, the overall bullish sentiment towards base metals sector and potential for sustained period of high prices over the next three years remains intact, there is no doubt that currently the market is seen rebalancing in the short-term as demand growth has slowed. As a result, short-term price pressure is expected to be downward.

OECD Data

Lead indicators have been suggesting a decline for last several months.

The silver lining is that the leading indicators for G-7 and the 30-nation OECD rose slightly in September, according to OECD data released on Friday. This is the first rise since March 2006.

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