Gold to remain bearish this week

MARKET OUTLOOK

Gold is likely to remain bearish this week. The liquidation by funds could stretch further due to the weak crude oil and strong dollar, thereby reducing the metal’s appeal as a “safe heaven” hedging instrument against inflation.

Investors who bought gold at a time when the dollar was weakening, would sell the metal in anticipation of further weakness because of weaker-than-expected US economic data.

There has been a decline in fresh investments in the yellow metal in the wake of rising global inflation. Oil producing countries are the worst hit as the abrupt rise in prices of essential commodities, following massive dollar flows, has resulted in doubling of inflation across the region.

Gold may move in either direction this week. The price may move marginally up on renewed buying interest. In contrast, the lean season sales could take the metal below $840-$845. Analysts do not rule out the possibility of the yellow metal slipping below $800 in the long run. Last week, gold fell 5.2 per cent, the highest since March 21, as the dollar rallied against major global currencies amid signs of stagnating European growth.

Gold slid to a three-month low as the dollar headed for its biggest weekly rise in 3-1/2 years and looked set to fall further as investors liquidated their commodity holdings, said a report from Religare Enterprises. A stronger dollar typically pressures gold, which is often bought as a hedge against weakness in the US currency.

The dollar surged against the Euro and was on track for its biggest one-day gain in about five years as evidence mounted that the US economic slowdown is spreading to the Euro zone and around the world, damping the prospects of interest rate increases.

Gold is also being pressured by an across-the-board sell-off in commodities, with copper, coffee, sugar and oil declining. The yellow metal and crude oil broadly ignored geopolitical tensions following military conflicts between Russia and Georgia as there is no threat to the commodities’ supply, the report said.

US currency’s biggest rival, the euro, dropped below $1.50 for the first time since February after European Commercial Bank (ECB) President Jean-Claude Trichet said economic growth will be “particularly weak” through the third quarter.

The European currency slipped 1.4 per cent to 165.38 against the yen from 167.70. The dollar rose 0.67 per cent to 110.18 yen after touching 110.36, the strongest since January 2.