Gold likely to decline further

MARKET OUTLOOK

Gold is likely to remain subdued this week due to the strengthening dollar and falling crude oil. The yellow metal is set to decline by another $35-40 an ounce and trade around $800 in London. However, the near-month contract on the MCX may slip below Rs 10,800 per 10 gram before moving up.

According to Ashok Mittal, an analyst with Karvy Commodities, the appreciation of the dollar against major currencies could boost the economic health of the US, thereby making investments in paper-related products more attractive. Thus, the fund’s investment in physical commodities might decrease, he added.

“With dollar appreciating and crude oil falling below crucial support levels, precious metals could see further weakness in coming days,” said an analyst associated with a large city-based research company.

Crude oil is unlikely to move up, barring an attack by Israel on Iran or a hurricane, the analyst said.

The US stocks could extend their modest gains next week due to the rangebound crude oil prices and rising dollar, even in the face of troubling consumer and housing data, a report from Religare Enterprises said.

Last Friday, short-covering lifted the yellow metal from the support level of $771 to a close of $795 an ounce. The precious metal recorded a weekly fall of around 8 per cent.

The metal for December delivery closed at $792.10 an ounce on the New York Mercantile Exchange, down 2.8 per cent for the session and 8.4 per cent on a weekly basis, hitting the lowest mark for this year.

Dollar rose to a six-month high against the euro (at $1.8) on Friday, prompting the leading investors to increase bets on easing inflation and slower global growth.

The euro, the second most acceptable currency after the dollar, tumbled to the lowest since February 21, after reports that the euro zone economies shrank in the second quarter for the first time since 1995.

Commodity investors who have been investing in precious metals and energy on the strength of the global growth story and to hedge against a weak dollar, are offloading their holdings and taking positions on the dollar, said the analyst.

The latest report by Citigroup expects the precious metal to rebound by 2010 due to a rise in the demand for fabrication. But the near-month price outlook is still bearish, the report said.

The Federal Reserve kept its benchmark interest rate at 2 per cent for the second consecutive meeting on August 5 as inflation accelerates and the economic slowdown shows signs of deepening. If the Fed continued to hold the rates low, inflation and dollar devaluation are likely intensify, favouring so-called hard assets and gold, according to the report.

Gold April 09 contract receded by 6.68 per cent to Rs 11,828 per 10 grams and gold M September 09 contract by 4.24 per cent to Rs 11567 per 10 grams during the week ended Thursday. The gold guinea August 08 contract slumped 4.65 per cent to Rs 9267 per 8 grams during the same period.