Currency movements hold the key to gold prices

The year 2009 that started amid serious global financial turmoil is expected to end with cautious optimism about improved growth in the New Year, signals for which have emanated from the latest OECD composite leading indicators. The data reinforce the improving world industrial outlook, although from a low 2008 base. China, Korea and India are seen leading the way. China in particular has had an exceptional growth rate. Indeed 2009 will be remembered for China's extraordinary role in supporting commodity markets with voracious appetite for consumption of energy products, industrial and base metals as well as agricultural goods. With the US and EU moving into positive territory, the Asian growth story presents improved industrial output growth potential for 2010. This will have implication for the commodity markets. So, in early 2010, further price gains for crude and base metals are on the cards. But there of course are risks. China's commodity import demand may slow down. There could also be acceleration in supply growth. Importantly, the US dollar may end the recent trend of weakness which can create downside risk for precious metals. Gold: In the week that saw the US dollar make a surprise reversal of weakening trend, gold prices declined steeply from their stratospheric levels of over $1,200 an ounce. Profit taking by less-committed speculators pushed prices down. In London market, the Friday PM Fix was $1,124/oz, down from $1,128.50/oz the previous day. Silver AM Fix was at $17.51/oz. In the weeks ahead, short-term investors may call the shots. Currency movements will be the key to gold prices. Foreign exchange strategists believe the US dollar could bounce back in the short term, pushing gold prices down although longer term price prospects appear intact. Base metals: Aluminium closed at a 14-month high on Friday at $2,240 a tonne. Although the complex is likely to benefit from positive demand signals from OECD area, reversal of the recent US dollar weakness exposes it to some risk. In the short-term, copper and nickel stand out as best investment opportunities. While nickel prices are seen having over-shot to the down side, copper inventories are less than normal and supply disruptions are seen. Crude: Prices have fallen sharply. However, the consensus view is that trading at sub-$70 levels may not last long given the market fundamentals and continued supply restrictions.