Medium-term outlook appears positive
G. Chandrashekhar

Mumbai, Jan. 20 Despite heightened speculators’ interest, towards the end of last week, gold shed some of the gains it made in the previous days, following long liquidation and profit booking. The price correction occurred in the context of concerns relating to the US economy and equity market as also dollar movements.

On Friday, London PM Fix was $882 an ounce, down from $888.25/oz the previous day and down from $891/oz a week ago. Silver followed suit. On Friday, London AM Fix was $15.83/oz, down from previous day’s $15.88 and from previous Friday’s $16.06/oz.

The week also witnessed the largest ever outflow of funds (21.5 tonnes) from a gold exchanged traded fund (Street-Tracks). The GFMS gold survey continued to paint a positive picture for the outlook of the gold market.

Physical demand

There is belief that investment demand would drive the market up, despite physical demand showing clear signs of slowing. The report cautioned about the possibility of short- to medium-term price correction given the speed of the recent price rise and the speculative length. GFMS does view $1,000 as a clear possibility later this year.

While the medium-term outlook for gold looks positive on current reckoning, dollar is likely to be the key determining factor. Demand-supply fundamentals of the gold market are tight. Even small changes in demand or supply or both will have a disproportionately large impact on prices.

In India, very clearly, high prices have driven household buyers away. Scrap sales are expanding. Physical imports have begun to dwindle. In a market that displays volatility and rapid price rise, savvy speculators, and not actual users, benefit. Therefore, caution is needed in trading gold at these elevated levels.

Downside correction

With the market having recorded a phenomenal price increase in 2007 and prospects of further increases appearing positive, old resistance levels are now turning into support levels. Whether the downside correction has run its course remains to be seen. Technical analysts assert the yellow metal will resume its uptrend.

http://www.thehindubusinessline.com/2008/01/21/stories/2008012151270700.htm

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