Hedging status, $ rise to keep gold soft

Gold is unlikely to correct its losing streak this week on speculation that the metal is fast losing its status as a hedge against inflation. Moreover, the dollar is strengthening against major global currencies. However, the metal may find some support in the form of crude oil, which may rise as Hurricane Ike, a potential catastrophe, is likely to strike the United States in the southwestern region.

Crude oil and gold commonly move in a similar direction against the dollar.

According to Ashok Mittal of Karvy Commodities Broking, gold’s next support level is seen between $732-735 an ounce (oz). Upon breaking this support, we may see the metal tumble to $680, he added. On the other hand, the yellow metal may find resistance at $785.

The opinion was seconded by Angel Broking’s Navin Mathur, who believes that Hurricane Ike may create short-term blips in crude supplies this week, which could drive gold prices. This, however, would not be sustainable for the long run as the financial and commodity markets have left investors in the doldrums. Crude oil, after touching the high of $147 a few months ago, has has fallen below the psychological barrier of $100 per barrel.

On Saturday, investors in all asset classes, including equity markets, are moving towards bank deposits .

According to a report by Angel Broking, oil inventory fell sharply as refineries shut down in the Gulf of Mexico. More than 95 per cent of the oil refining capacity and 93 per cent of natural gas processing facilities have been shut due to Hurricane Ike.

The yellow metal’s prices have also tumbled on profit-taking triggered by uncertainty over the future of troubled investment bank Lehman Brothers. Data show a second straight month of decline in retail sales.

The latest report by Religare Enterprises shows that inflation in the US plunged faster than expected in August as a sharp decline in energy prices brought overall prices down, according to the Labor Department.

Spot gold touched a low of $735.90 an oz on Friday thanks to high volatility in the currency market. Gold has dropped 8.8 per cent so far in 2008 and 26 per cent since the record level of $1,033.90 on March 17.

However, analysts see this as an opportunity to stock gold as broking firms have started advising their clients to take a long-term view on commodities. Hence, prices are likely to rebound in the long run when physical demand begins in India, the largest gold consumer, with the onset of Diwali.