Bullish sentiment to continue in gold and crude for short term

Gains will be capped amid uncertainty on the outcome of FOMC meeting this week

Continuing insurgents’ fight in Iraq may underpin gold demand in the short term resulting into bullish sentiment in bullion. But, the gains will be capped on expectations of decision in the scheduled meeting of the Federal Open Market Committee (FOMC) in the US late this week.

Gold price hit two week high last week on heightening geo political tensions continuing its bullish sentiment. August gold futures rose ended the week with a gain of 1.72% at $1274.10 an oz on the Comex division of the New York Mercantile Exchange. July silver also rose with a weekly gain of 3.5% to $19.655 an oz.

Geo – political tensions heightened last week with insurgents captured the key city of Iraq, near one of the country’s main oilfields. Analysts believe that continuing fight will escalate tensions between Syria and Iraq which will support both gold and crude oil prices.

“Bullish sentiment is likely to prevail in gold in near term if fighters continue insurgency in Iraq. That will also support crude oil prices’ upward march,” said Gnanasekar Thiagarajan, Director, Commtrendz Research.

Meanwhile, crude oil prices also moved nine month high on Iraq crisis. Concerns are that areas under militants control are rich in oilfields. Oil supply from Iraq may be disrupted in case, militants capture another key cities of Iraq.

“Iraq had started supplying between 2-3 million barrels of crude oil in the last few months which may be hampered in case of heightened tensions in the country. Hence, crude oil prices have gained much in the last few weeks. Going forward, however, crude oil will remain firm but gold will ease faster than energy,” Thiagarajan added.

In fact, equity markets have witnessed a sharp decline in the last few days. Investors have therefore, opted out of equities and transferred a part of their investment funds to gold and energy. Gold therefore, has seen a safe haven buying from investors after a long period of consolidation.

In fact, the economic data including unemployment numbers shown by the United States, have been weaker than market expectations. As a consequence, markets fear reparative measures by the US government to bring its economy again on track. Also, China reported a marginal recovery in its industrial production rising to 8.8% in May as compared to a rise of 8.7% in April.

“Bargain buying at lower levels and escalation of violence in Iraq are the prime reasons for the rally. This positive momentum is expected to continue if militants in Iraq take control over southern area which has majority of the oil fields and infrastructure. Spot silver prices have been flat throughout the day as speculative investments in silver seem to have dried up with recent fall in prices,” Prathamesh Mallya, Sr. Research Analyst with Angel Commodities Broking.

NYMEX crude was trading higher by around 0.5% at $107/ bbl. Further disturbance in the region can lead to supply constraint supporting prices. On the flip side, Libyan supplies are still out of the market acting as a positive factor.