Crude to remain weak; gold likely to falter this week

Written by Kuljeet Kataria | Updated: Dec 1 2009, 05:00am hrs
Commodities rallied in the first half of the week as risk appetite returned due to good positive economic data in the US. Barring reduction in the second Q3 US GDP numbers and a fall in durable goods order, other sets of data held the markets.

October new homes sales were up almost 7%, while existing homes sales were up 10% from previous month. Initial jobless claims dropped to 466K from a downwardly revised 505K in the prior week, which was a positive signal.

The US Conference Boards index of consumer confidence increased slightly to 49.5 in November from 48.7 in October. A slightly positive FOMC minutes also supported the markets as FED officials stated that the recovery was durable and the decline in dollar is orderly. Officials also said that unemployment will rise further but forecast a slightly higher GDP figures. With all the positive news flowing in, gold tested its all-time high of $1195 on the COMEX, just a shy away from the psychological $1,200 mark. On the MCX, gold December contract traded above Rs 18000. Crude was caught in a range whereas copper traded higher and tested $7,000 on the LME .But later in the week, all the markets witnessed a sharp drop due to Dubai Worlds surprise restructuring announcement. The news surprised the global markets creating fears of a new crisis hitting the world financial system. Reacting to the news, dollar strengthened with commodities and equities both correcting sharply. Gold approached $1,200 on COMEX before falling to as low as $1,135 on Friday.

Earlier in the week, golds journey towards $1,195 was attributed to strong central bank demand from Asian economies. Sri Lankas central bank became the third one in the world to buy gold (10 tonne) from the IMF this month after the Reserve Bank of India and the Central Bank of Mauritius purchased 200 tonne and 2 tonne, respectively.

Apart from central bank demand, gold was also buoyed by robust investment demand.

Holdings in the SPDR gold trust, the worlds largest exchange-traded fund backed by bullion, rose by almost 0.92% to 1127.86 tonen on weekly basis. Although we hold our long term bullish view on gold, a short term correction is on the cards. For the week, we expect gold to trade in the range of $1,192-$1,144 on the COMEX. Strong support is pegged at $1,144, break of which will take the prices to as low as $1,118.

Crude oil futures rose in the first couple of days of the previous week on back of a falling dollar and also due to seventh month consecutive rise in Chinese oil demand, which was up by 10.3%.

The rise in imports was mainly due to refiners producing at higher rates because of a recovery in the worlds third largest economy.

But the rally didnt sustain at higher levels due to the uncertain pace of economic recovery and weak fundamentals of demandand supply.

Further, the Dubai debt concern triggered a second wave in the credit crisis. The prices dropped to as low as $72.50 after the psychological support of $75 was broken on Friday. Since the past few sessions, crude was trading in a tight range of $75-82 which was broken on Friday with the price testing the six week low of $72.50. We continue with our bearish view for crude oil in the coming week, as bleak fundamentals will cap crudes upward movement.

The trading range for the week would be $73.50-77.50. Break of $73.50 will take the prices down to $70. Copper too pared its two week rally on Friday on back of uncertain economic outlook. The fall in crude oil and the red metal is indicative of the fact that just with optimism of economic recovery, market cannot sustain at higher levels.

As stated earlier, economic data from the US were pretty good this week showing some signs of stability in the economy.

On fundamentals, Chinese copper imports were weak. We expect that downside in Chinese imports will continue in coming months, which will further pressurise copper prices.

(The author is head of commodities, Motilal Oswal Financial Services Ltd)