The Hindu Business Line : Gold may remain muted in short term

Market talk
Inflation concerns, geopolitics, crude prices & exchange rate affecting gold market.
Gold demand-supply fundamentals have less to do with market prices.
Price prospects upbeat for a number of agricultural commodities.

Mumbai , Dec. 24

A combination of circumstances, it appears, has got gold trapped in a range in recent days; yet, there are indications that it is consolidating at around $610-620 an ounce levels. On Friday, LME cash price was $619.75/oz (PM fix).

Agents of impact

Inflation concerns, geopolitics, crude prices and Euro/USD exchange rate have all in some way and in varying degrees been impacting the market. But importantly, in recent times, the metal has been moving in response to strength or weakness of the dollar.

Seemingly benign crude prices, slowing global economic growth and importantly, less-than-expected dollar weakness have all meant that the bull story of gold could not been carried farther; a number of tactical investors have liquidated their long positions and exited the market.

An additional provocation was the data released by European Central Bank that showed sale of 26.8 tonnes during week-ended December 15, bringing the total sale of gold so far this quarter to 90 tonnes, compared with approximately 125 tonnes during same period last year.

Seen muted

Now, in the midst of a holiday season, the market could be expected to remain muted. What would be of interest is the likely behaviour of the metal early in 2007. Despite the fact that the dollar is holding up against the euro, analysts are near unanimous that it is only a matter of time before the dollar begins to weaken further based expectations of upcoming economic data. That should provide a fillip to the metals market in general and to bullion, in particular.

Very clearly, gold demand-supply fundamentals have less to do with market prices. In price sensitive consuming countries such as India, there is a definite slowdown in consumption. Poor farm sector growth and not-so-satisfactory rural incomes impact demand.

IMF sales

However, reports of central banks (especially Asian central banks that collectively hold about $2 trillion) diversifying into gold surface from time to time, providing support. Reports of gold sales by IMF too fall in this category of providing temporary and controversial signals to the market.

So, for a sustained price action, watch out for real price signals - inflationary expectations, crude prices and of course, euro/dollar movements. Foreign exchange analysts are betting on the dollar weakening in the first quarter of 2007.

Interestingly, for 2007, most analysts are upbeat about price prospects for a number of agricultural commodities including corn, vegetable oil and wheat.

Bio-fuels' influence

To a large extent, bio-fuels have changed the agri-commodity landscape. Rising demand for bio-ethanol (made from corn) in the US means a strong need to produce more corn which in turn is expected to result in a major shift of acreage to corn.

Acreage shifts to corn will most likely impact oilseeds (soyabean) and wheat. Even as additional output of corn through expanded acreage may not be sufficient to meet the raw material needs of over 100 bio-ethanol plants currently operating in the US alone, fewer acreage for soyabean and wheat will reduce their production.

Soya surplus

Soyabean may be in surplus currently; but the surplus could vanish sooner than many think, driven again by rising biodiesel demand. Wheat prices too have an upside potential.

In all this, weather is crucial determinant of market direction. Weather uncertainties (threat of El Nino for Asia, for instance) can spike prices to levels not seen in recent past.

It may be premature to talk about output and prices; but the direction for many commodities seems clear.

More Stories on : Gold & Silver | Outlook

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Why global cos are keen on Hutch Essar

`To get best benefits to passengers, the key is efficiency'

Fund managers betting on stock-specific action in 2007

Govt committed to growth, viability of public sector: PM

BPCL to sharpen focus on `Beyond LPG' service

There Is Always An Alternative

Dwarikesh Sugar looking to acquire `large company'

Passenger car market on a roll in 2006

Facility management sees rapid growth

Satyam's global expansion in sync with local needs

Gold may remain muted in short term

Cumin seed exports may cross 25,000 t

Holiday mood may keep market range-bound

Banks' deposit mobilisation catches up with credit offtake