Further cut in Fed rate may accelerate gold rally

MARKET OUTLOOK

More interest rate cuts by the US Federal Reserve to protect its slowing economy are likely to strengthen gold prices further with the metal being a safe haven for investors having offered handsome returns in the last year-and-a-half.

Additionally, closure of mines in the wake of power shortage in South Africa have affected supplies badly. As a consequence, the metal has enjoyed great support from retail and institutional investors which will continue to boost it in the future.

Thus, gold is set to touch $915 an ounce this week. However, after breaching this level, the metal may take another two to three months to hit the $950 an ounce-mark.

In India, however, standard gold may see good support at the present level of Rs 11,630 per 10 grams and is likely to rally beyond Rs 11,800 per 10 grams this week. The breach of the Rs 12,000-mark is on the cards, too.

The US Federal Reserve cut the key lending rate twice (75 and 50 basis points) last month to 3 per cent, providing fresh funds for the US and world economy.

However, experts believe the rate cuts haven't help revive the economy. Hence, prospects of a further 50 bps cut looms large.

High prices have dampened demand in India severely as total imports in January were a meagre 4 tonnes from 62.5 tonnes in January 2007.

India, the world's largest gold consumer, is a market sensitive to price fluctuations. The nominal imports in January were a result of the knee-jerk reaction to volatile and high prices.

"Even if the price moves in the higher range, consumers will get used to it and demand will resume," said Jayant Manglik, head (commodities) at Religare Enterprises. Manglik believes that both gold demand and prices will continue to go up.

In the last year-and-a-half, gold offered 32 per cent returns which other asset classes failed to achieve. Reportedly, the International Monetary Fund (IMF) is unlikely to offload gold in the physical market before two to three months as it may wait for prices to rise further.

Meanwhile, investors from other classes are gradually shifting their funds towards gold which is evident from the record gold trading in London during January.

Trading volumes in London rose to a 19-month high in January at an estimated average of 25.3 million ounces. Trading volumes in January 2007 stood at 17.1 million ounces.

Gold remained volatile last week in Jhaveri Bazar, a major spot market in Mumbai, with prices touching high of Rs 11,895 per 10 grams on Monday.

However, weak sentiment continued to prevail throughout the week with fresh orders for weddings drying up. The metal ended the week at Rs 11,630 per 10 grams.