By Ruma Dubey, Source: fwd mail
Two metals are shining so bright that it is almost blinding. Copper and gold. Both the metals – one red and one yellow are spreading their hue all over, outshining equities and even crude!
Yesterday spot gold saw a high of US$1607.01/ounce and today for the 12th straight day, the gain continues as it currently hovers around $1,605.16/ounce. Copper too is rising fast. Yesterday, it was up 14% from the low of $8,504.50/ tonne it had scaled in May and was at US$ 9,694.25/tonne on the London Metal Exchange. This is so close to the record high of $10,190/tonne which it had scaled in February.
And herein lies the anomaly. Gold is up usually when there is uncertainty in the world economy. The fear of US defaulting on its debt and the crisis in Europe; these two factors have understandably made gold a safe haven. On the other hand, copper is usually considered to be a metal of rebuilding; it usually indicates that infra building is ‘on’ which in turn is a harbinger of things being good with the economy. The news is that China is back to importing copper as till the first half of CY2011, it used up all it’s piled up inventories. Imports in June were up almost 10% at 280,000 tonnes,on a YoY. So on one hand we talk of global uncertainty and then on the other of China getting back to economic growth. Can both go hand-in-hand? Yes, there are supply worries too due to rain disruptions in Chile, which is the largest exporter of copper in the world. But can that alone push copper prices to such highs?
So the big question is – can gold and copper rise together? First gold. If the US announces a debt plan, like a sprinkling of water on boiling milk, the boil in gold prices will simmer down. Ditto if Europe crisis also comes to some logical conclusion. Thus the bull run in gold which we see now could get culled the moment either of these crisis is resolved. That does not mean that gold will lose its lustre; it would only mean that like normal, central banks and routine demand will drive the prices, not speculation. But therein lies the suspense as no one can predict as of now whether or not US will have a plan at all. Therefore till we see light at the end of this long tunnel in Europe and USA, gold will shed its shine and lead the way.
Copper, for now is led purely by China. Falling inventories and strong demand from China is expected to keep the price buoyant. But what if USA and Europe crisis continues? Surely we are then talking of a recession. In that scenario, when global demand ebbs, it is unlikely that China will be able to lead the growth story, all by itself. That in turn would mean softer copper prices but much higher gold prices.
If one thinks logically, it is difficult to fathom that US will not work towards raising the debt ceiling. President Obama has warned that if the debt ceiling is not raised, Social Security cheques may not go out in August. According to a report prepared by Republican Senators, US will receive about $172 billion and have bills totaling about $307 billion due in August, leaving a shortfall of about $135 billion. To keep from defaulting, the Treasury Department would first need to pay interest on the treasury bills due in August, which will be about $29 billion and social security would need payments of $49 billion. Thus these two might go through, avoiding a debt default. But there would be tonnes of other bills within the US which would need to be settled, which tallies to $115 billion. If these bills are not cleared, the US economy could get into serious trouble. And it is to prevent this crisis that all fingers point towards the logic that US will in all probability raise the debt ceiling. On the Europe front, the EU Summit is meeting on Thursday to work out ways to prevent a contagion.
Thus if these two crisis does get resolved, gold is sure to get off its wild ride on the bull’s back. Yet, analysts say that even if it falls, the downward support would not fall below $1500/ounce. And on a long term, the target is set for $1,650 to $1,700 by December. And copper will also continue with its ride, unless supply issues get resolved.
Historically, gold and copper have moved up together but it is copper which has always emerged the winner. Assuming that the world will not be pushed into another bout of recession, the shine in both the metals is expected to stay intact.
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