Gold breaks $510 mark, MCX futures hit Rs 7640

Triggers: fund buying on inflation fears; yen's fall against dollar, euro

Domestic spot gold (.999 purity) today rose by Rs 20 from the previous close to Rs 7,680 per 10 grams and the MCX February futures (.995 purity) touched a high of Rs 7,640 (per 10 gm).

This was in tandem with overseas spot gold soaring over $510-an-ounce mark in early Asian trading, supported by fund buying on inflation fears and Japanese yen depreciating against the US dollar and the euro.

The yen depreciated to a 32-month low against the dollar (1 dollar = 120.9 yen) and its lowest-ever level against the euro (1 euro = 142.74 yen), following rock-bottom interest rates in Japan.

Gold prices are on a rise for two months now, and this has choked any physical demand in India. "Physical buying is taking place heavily in China, Japan and Turkey," said a trader with a public bank.

However, on the other hand, rising spot prices have led to good volumes on the domestic MCX gold futures.

"Futures cost about Rs 10,000 per kg lower than gold's import cost, which has risen significantly with the rupee depreciating against the dollar. Cheaper futures have brought in good trade volumes, and open interest can be seen on gold contracts, especially the MCX February futures," said Suresh Hundia, proprietor of Mumbai-based Hundia Exports.

Market players suggest that as gold prices will rise further, those selling their position are likely to make good profits, "especially with intra-day movement being over Rs 70 for the last one week", as another trader puts it.

The open interest and volume of the MCX February contracts are a good indicator.

Dollar and gold are seen to be inversely related. So, the dollar appreciation hints that investment is shifting from the yellow metal to currency.

However, for a month or so now, both gold and dollar have continued strengthening on good support from overseas buyers. Market players feel as buying gold overseas is cheaper than that in India it makes such a movement possible.

"A similar trend was seen last December also. The correction expected in gold earlier is not happening, and it seems the upward movement may just continue," said Hemal Doshi, a precious metals analyst with Refco Commodities.

In the short term, gold is expected to trade between $505 and $512 (an ounce), with major support seen around $502-$498, he said, adding that if gold were to exceed $512, it may cross $525.

The $525-an-ounce level for overseas spot gold, seen as an impossible target to be achieved in December, now seems possible, said a Mumbai-based gold trader.