Dubai Gold and Commodities Exchange Weekly Market Views - November 8, 2009

Please note that the observations and views expressed in this newsletter do not reflect the views of DGCX and are solely the view of the writer (CPM Group).

Investor repositioning may push crude oil prices lower this week. Prices have had difficulty making further upward moves after breaking above $80 a couple of weeks ago, which may cause some profit-taking among short-term investors. A move among institutional investors and proprietary traders to roll their positions forward at this time also could contribute to the price weakness. Last week’s U.S. Department of Energy inventory data indicated that there was some strengthening in petroleum demand. Even so, prices between $75 and $82 are close to the levels that currently weak global economic conditions can tolerate. Buffer production capacity in OPEC, built up inventories, and only muted signs of stronger demand still do not warrant a move toward $85. With some moderate investor selling this week, oil prices could fall to $76.

Silver prices could possibly test $18.00 this week. Volatility will continue to plague the silver market as prices may begin to move sharply higher beginning this week or next. That said, at such high levels silver remains vulnerable to declines, however. The concept of a $2.00—$3.00 drop in prices in just a few days is not at all alien in the silver market. Wedding season in India is underway, which is expected to keep demand for silver jewelry and decorative objects firm. Since Indians are extremely price-sensitive in making their purchases, any dips in prices will be taken as a buying opportunity. Although many investors have begun to re-deploy some of their assets into stocks and bonds, they still remain concerned about the developments in the global economy. Also, financial markets remain fragile with questions remaining concerning long-term sustainability. In this environment investors have pulled back on selling any silver they have had and in fact have added more to their portfolios as a means of strategic diversification. As of 6 November combined ETF silver holdings were 427.8 million ounces, down slightly from a record 427.9 million ounces on 30 October.

The euro may trade in a similar range to what was seen last week, between $1.46 and $1.50. There was a surge in currency volatility last week as several major central banks had their monetary policy meetings, including the European Central Bank (ECB). The ECB left its main interest rates unchanged at 1.0%. Bank President Trichet remained concerned over still weak economic conditions in the Eurozone. Concern has risen over the domestic banking sector in Europe as economic data continues to be weak. Last week eurozone retail sales were reported to be weaker than expected in September while Ireland’s credit rating was downgraded. Despite current economic weakness, some liquidity measures are scheduled to end in the coming quarters.

This week the Indian rupee is expected to move sideways between 209 cents and 213 cents per 100 rupee, with a downward bias. There has been no fresh fundamental news affecting the rupee. Last week the rupee traded in a thin range, mostly moving between 211 cents and 213 cents. A large part of the rupee movement has been tied to swings in the domestic equity markets. Any correction in the Sensex, the benchmark stock index of India, could weigh on the rupee. The rupee has managed to settle above 211 cents over the past several weeks, reflecting increased capital flow of funds from foreign institutional investors. Foreign investors purchased $152.5 million in Indian equity last week. The Sensex meanwhile rose 1.6%.

The pound may head back toward $1.62 later this week. There was increased volatility last week ahead of the Bank of England’s (BOE) monetary policy meeting. The pound surged toward $1.663 from $1.626 earlier in the week. Market participants were expecting an increase in the BOE’s quantitative easing program. The increase was 25 billion pounds, less than 50 billion pounds that some had anticipated. This lower figure helped support the pound, but such an increase in the BOE’s asset purchase program suggests still high concern over economic conditions in the United Kingdom. If economic data for the United Kingdom continues to be weaker than markets expect the pound may continue to experience downward pressure. The BOE is expecting the additional 25 billion pounds to be used in its asset purchase program by the end of the year.

The Japanese yen could relinquish some of its gains this week, falling toward 108 cents —109 cents. There were no major economic figures released in Japan last week. This kept the yen trading quiet most of the week, hovering around 110 cents. However, on Friday 6 November the yen rose to 111.2 cents as many investors rushed to purchase yen as a refuge. Unemployment figures released in the United States remain at high levels. The Japanese economy is in as bad or worse shape as the United States. There have been talks about Japanese government pumping in additional liquidity into the economy to fuel domestic consumption. This could weigh on the yen. That said, if there are signs that the current rally in financial markets is losing its steam, the yen could once again pick up as investors return to the yen as a safe-haven.