Gold's future hinges on hedge funds

MARKET OUTLOOK

Uncertainty prevails in the global precious metal market following the unpredictable moves of hedge funds in equity and commodity markets. Hedge funds alternate between equities and commodities depending on the returns they offer.

The mood is buoyant in the commodity market, especially after the collapse of US investment bank Lehman Brothers. A rise of the dollar against major global currencies has led to investors flocking to the greenback. Investors are betting big on gold following London-based consultancy Gold Field Minerals Services’ (GFMS) forecast of a supply constraint in the four major gold mining countries of South Africa, Australia, the US and Canada.

“The future of the entire commodity basket, in general, and precious metals, in particular, is pretty shaky. Therefore, moving towards one particular basket of investment options may not be profitable,” said experts. Still a number of funds, including London-based O’Connor, have raised the commodity allocation target for this year, assuming gold’s upward potential on the global cut in output. O’Connor currently works with the asset allocation of the Irish National Pensions Reserve Fund, the 35th largest pension entity in Europe, managing around ¤20 billion .

The yellow metal’s short-term outlook is very difficult to ascertain looking at the development in other asset classes like the dollar and the US Treasury’s financial package to the embattled US financial market. “The dollar’s movement will determine the fate of gold,” said Jayant Manglik of Religare Enterprises.

Bhargav Vaidya, an analyst at BN Vaidya & Associates, a precious metal trader based in Mumbai, said, “No fresh business was transacted on Friday because of high volatility as buyers remained optimistic for a further price correction. However, old orders remained unaffected,” he added.

The current price volatility can largely be attributed to the rising gold price in the international market. However, the rupee’s depreciation and crisis in the financial market have also persuaded funds to play in the gold market to recover losses incurred in other asset classes. The Indian currency fell over 12 per cent in the last one-and-a-half months. The currency recovered from the lows of 46.93 early this week to close on friday at 45.85 against the dollar.

Moving inversely against gold, crude oil gained over 6 per cent on Friday to trade at $101.22 a barrel against Thursday’s late evening level of $96.63 a barrel.

Spot gold in London marginally fell to $858 in early Friday trade due to funds diverting their interest to the financial market that witnessed a recovery. In the previous session, gold hit a high of $902.60 an ounce, its highest since August 4. Gold sees support at $800 and resistance at $880.

Vaidya believes that gold will continue its downward trend to stay below Rs 12,000 per 10 grams in India and below $800 in London, which will open a window for fresh investments during Diwali.