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Gold surges on fund buying

G Chandrashekhar

MUMBAI, May 20

DESPITE a neutral Bank of England 20 tonne auction on Tuesday, gold last week experienced a massive surge and found buying support to break above $270 an ounce. But later in the week on Friday, after trading quietly in Europe on softer euros and lease ra tes, prices blasted through the key resistance level of $275/oz. London PM fix on May 18 was $273/oz, an increase of 1.5 per cent week-on-week.

Pointing out that the move was clearly a hugely positive step for gold, Mr Kamal Naqvi, analyst with Macquarie Research Equities, said prices breaking above $276 forms a positive medium to long-term structure, while the move will bring the metal back int o the spotlight even for generalists.

Importantly, the move is seen to have been driven by fresh buying rather than short-covering. ``Movement of gold will depend on further fund buying, but it certainly appears that further tests of the upside are likely,'' Mr Naqvi said.

Fund interest was sparked by the US Fed's decision to cut interest rates by 50 basis points last Tuesday. There are two justifications - firstly, that the gold contango (dollar LIBOR minus gold lease rates) had slumped to 2 per cent across the curve, cha nging the ratio of risk-reward of forward selling gold; and secondly, that the aggressive interest rates cut (and signs of more to come) had raised inflationary concerns, the analyst reasoned.

In addition, in its annual meeting in London, the World Gold Council unveiled a new marketing push whereby a new image for the yellow metal will be sought to be created.

Silver finally pushed higher gaining initially from the strength of gold and then finding some renewed fund buying support. The metal was quoted at $4.45/oz London AM fix, up 2.4 per cent week-on-week.

Palladium prices recovered late last week after prices had fallen below $630/oz. It closed at $655/oz, a gain of 1.2 per cent. Platinum prices continued to tread ground above $600 to close at $613/oz, gaining 1.2 per cent.

In Johnson Matthey's latest review of the PGM markets, Platiunm 2001 - demand is weakening but is still more than mine supply for platinum and, especially palladium. Thus Russian supplies from stocks remain critical. JM forecast a platinum price for the next six months of $550-625 and palladium in a $550-750 range.