Correction may be around the corner

However, top is yet to come in gold’s rally

MUMBAI: What a way to usher in the New Year! The trading in precious metals began with a bang and the price of gold took a jump of more than $25 right on the first full-fledged trading day at the COMEX. No doubt it was not just the yellow metal but a broad range of commodities that rose spectacularly, as if to announce to the world that 2008 was the year of commodities in general and of gold in particular. Silver and crude also took wings, with the white metal going beyond $15 threshold and crude oil hitting a century.

On Tuesday after trading for throughout the day near $835, the yellow metal took a sharp upswing after the New York market opened and was suddenly in $855 levels. By the late evening hours, the price had zoomed to $861.80 an ounce.

The upswing was again in coordination with the forex market moves. The dollar fell against the euro, extending last year’s 10% decline. (Gold has had a correlation of 0.73 against the euro-dollar exchange rate in the past three months, compared with 0.57 in the previous three months. A reading of 1 would mean the two moved in lockstep.)

It dropped to a four-week low versus the yen after a report showed that the US manufacturing unexpectedly contracted in December. The dollar fell yet again on Friday to a one-month low against the euro after a government report showed that the US employers added fewer jobs in December than was expected.

No doubt the bleeding headline of the week was crude hitting the most astonishing century. Oil traded reached a record $100 a barrel in New York on Tuesday for the first time in the history of humankind. The upswing was undoubtedly aided by the weaker dollar, though it was spurred by concerns about violence in Nigeria and the apprehensions that the civil war kind of situation prevailing there may further cut output in Africa’s biggest oil producer.

I called the oil’s rise as the bleeding headline because while gold’s price rise does nothing to the global economy, that of the oil does a lot. Triple-digit prices may bring energy costs near the tipping point that will cause global economic growth to falter. The global economy is certainly not in a condition to absorb this oil shock, given the fact that it is yet to pull itself out of the subprime crisis and the resultant credit crunch.

Coming to the trading pattern likely to unfold during this week; I foresee a sideways movement or even a downward movement. With gold price moving far above the 20-day moving average ($819) and way above the 100-day moving average ($764), one can say that gold’s recent price surge has been aggressive.

This kind of rise always attracts speculators. With the 14-day relative strength index quoting at 68, it would seem that the top is yet to come in this rally. Once it comes, we should not be surprised to see gold retreat as far back as $814, the intermediate support. Once, however, the prices take a U turn from there, there would be a good case for seeing them breach $900 an ounce, a very big landmark indeed.

editor@commodityresearch.in