Consolidation coming up in gold prices, but silver looks stronger

The markets witnessed a higher turnover week as traders displayed improved participation levels due to hopes of recovery in the euro zone, coupled with a stimulus move by central bankers.
The week-on-week market wide turnover on the MCX rose by 9%.

The market wide open interest fell by 16%. MCX turnover gainers during the week were aluminium, cardamom, copper, cotton, crude oil, lead, natural gas, nickel, potato, silver and zinc. The open interest gainers were cardamom, cotton, crude oil, natural gas, potato and sugar. The US non-strategic petroleum reserves were higher by 3.9 m barrels, at the Rs334.7 m barrel mark, but failed to dampen bullish sentiments.

The rupee firmed up vis-a-vis the US$ and that may see some consolidation in gold prices in the absolute near term, whereas silver is appearing relatively stronger in line with the performance seen in 2009 - 2010.

Agri commodities
Mentha oil is showing a sign of exhaustion, as the onset of winter historically triggers the terminal phase of the up move. The weekly chart shows the Rs1400 levels proving to be a nemesis of the bulls. Watch the Rs1275 level below which the bears are to emerge stronger in the near term. Avoid fresh longs for now. Market internals indicate a 30% dip in turnover and 1% in open interest.

Potato has declined for the fifth week in a row and has been the primary constituent for falling food inflation. The winter months typically see vegetable prices decline due to longer shelf life, will also trigger a decline in potato prices. Avoid bottom fishing for now. Market internals indicate a 28% increase in turnover and a 15% increase in open interest.

Sugar M Kol has reacted mildly to profit sales as the parabolic rally in prior three weeks provided opportunities for bulls to make above average returns. The primary trigger for rising prices is the food security bill. Patient traders may accumulate on dips in the mid / far month series should the price fall by 3-5%. Market internals indicate a 5% decrease in turnover and a 138% increase in open interest.

Metals
Aluminium has seen a bounce back after the central bankers acted in concert to stimulate the markets. Aluminium, which had seen a record build up of shorts, witnessed short covering as the steep decline in open interest shows. The Rs110 - 112 levels will now become a resistance that must be overcome to sustain ably to reverse the weak trend. The `104-mark will be a short term floor. Market internals indicate a 47% increase in turnover and a 57% decrease in open interest.

Copper has rallied in tandem with the base metals pack as the flow of cheap money squeezed the bears into submission. The Rs425 level will remain the resistance as it is the upper trend line of a bearish channel in force since 40 weeks. Once this hurdle is overcome on a sustained closing basis, the trend may reverse for bullish. Hold existing longs if any, avoid fresh buying. Market internals indicate a 30% increase in turnover and an 18% decrease in open interest.

Gold has seen some consolidation as the rupee firmed up against the US$ and FII inflows into government bonds boosted overall inflows. As bond yields fell, and equities rallied, gold saw an easing in safe haven demand. Silver seems to be gaining favour with long-term investors. Watch the Rs28,600 levels in the coming week in the Feb series below which the possibility of profit sales is not ruled out. Fresh buys are ruled out till a breakout past resistance levels are confirmed. Market internals indicate a 2% decrease in turnover and 18% in open interest.

Nickel has rallied within the bearish channel and Rs940 level will be the trend determinator in the near term. Only a sustained trade above this threshold with higher volumes and open interest expansion, and will a bankable rally occur. Market internals indicate a 52% increase in turnover and a 9% decrease in open interest.

Silver is showing a return to its Rs2009 - 2010 form wherein it showed higher relative strength comparative to gold. The Rs58, 500 will remain the hurdle and unless the same is overcome forcefully, a sustained rally is likely to remain elusive. The Rs55, 500 levels will remain a support below which the bears may get aggressive. Long-term investors are showing signs of accumulating the metal for a rally. Market internals indicate a 6% increase in turnover and a 42% decrease in open interest.

Zinc will witness a resistance at the Rs111 levels which is where the price declined sharply in the week ended Aug 6 2011. A sustained breakout on a closing basis is needed to turn the tide for the better. Buy once a breakout is confirmed, market internals indicate a 21% increase in turnover and a 14% decrease in open interest.

Energy
Crude Oil has rallied in spite of a rise in US non strategic reserves and a firm US$. The trigger has been the stimulus by central bankers. The counter is showing signs of mild fatigue. Rallies maybe a little slower from here. Market internals indicate a 19% increase in turnover and 12% in open interest.

Natural Gas  counter weakened in the face of rising crude prices. The Rs175 level will now be a support and the 195 level as the resistance above which the counter must close if the up thrust is to hold. Market internals indicate a 10 % increase in turnover and a 71% increase in open interest.

The writer is the author of A Trader’s Guide to Indian Commodity Markets and invites feedback at vijay@BSPLindia.com

Fair disclosure: The analyst has no exposure to any commodities recommended above.