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Monday, Dec 11, 2006

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Uncertainty looms in major commodity markets

G. Chandrashekhar

Inflation versus growth dilemma could come to fore

For gold, "buy on dips" may well be a safe advice.
In base metals, long-term fundamentals still remain solid.
Sideways action likely in crude.

Mumbai , Dec. 10

After a period marked by lack of autonomous momentum in the market, gold reacted in response to the dollar weakening against the euro based on mixed US employment data. The metal declined to a two-week low in New York to $624.40/625.90 on profit-taking.Silver also fell in tandem, closing down at $13.65/13.72/oz.

Inflation worries

Inflation continues to be a matter of concern for the policymakers, while growth concerns too cannot be wished away. Inflation versus growth dilemma could once again come to the fore.

Crude market too has begun to edge higher following sporadic eruptions of supply uncertainties. Whether the monetary policy would continue to remain tight or less aggressive would depend on whether or not there is an expectation of moderation in inflation levels in the coming months. The ECB chief expects lower inflation levels in 2007. Should this be realised, a downward pressure on gold prices can be expected.

Lower momentum

Technical analysts are bearish and see consolidation taking place in the short-term. The momentum is pushing lower, and the recent upticks are a corrective phase ahead of further weakness in the near term, according a London-based chartist.

The downside target is seen at $614/oz in the sessions ahead, while $639/oz is seen as an important resistance. In the medium term, however, higher highs are yet to come. Choppy ranges could give way to the topside later this year or into the next. "Buy on dips" may well be a safe advice.

Industrial Metals

Across the board, metals have gained handsomely during the current year. Both demand side and supply side factors contributed to the phenomenal price run metals have enjoyed.

Falling inventory levels and severe shortages in many metals including copper, nickel, lead and zinc led to the price action.

In recent weeks, metals have headed for a softer patch; but long-term fundamentals still remain solid. Yet, there are signs of easing demand growth in the steel and base metals sectors. In steel, the weakness has led to production cuts being implemented in the US and Europe. In base metals, copper has been the only metal to apparently edge into a surplus. In many of the non-European markets, physical metal premiums have started to ease, indicating an easier supply picture, commented an expert.

Downside risk

It may be prudent to exercise caution in the short-term, given the near-term outlook for the US economy.

OECD composite leading indicators too suggest that there could be a downside-risk to growth in the first half of 2007. According to experts, slowing growth prospects could result in a fall in the average price of most base metals in H1 next year.


Prices have climbed back above $63 a barrel as market participants turned nervous over the possibility of OPEC production cuts, lower US inventory and problems in Nigeria.

Supply side uncertainties are leading the market. OPEC meeting scheduled this week would be crucial in deciding the extent of output cuts. There are also uncertainties surrounding supplies from Iraq.

The market seems to have an upside potential. Buying on dips may be a sound strategy. Close monitoring of supply side developments is imperative.

According to technical analysts, $63.75 is a strong hurdle that needs to be crossed so as to turn the trend higher. If done, the next target would be $65.75 and $66.72. However, it is more likely that sideways price action will continue this week.

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