Dubai Gold And Commodities Exchange Weekly Views 22 November 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).

Investors are generally bullish on the medium and longer term fundamentals in the oil market.  OECD crude oil demand has begun to recover, albeit from low levels. Non-OECD demand meanwhile has strengthened considerably since the second quarter. The demand fundamentals continue to present uncertainties, but are generally adding upward momentum to prices. However, technical signals such as a higher U.S. dollar and steady rises in OPEC production are pushing prices lower. OPEC production was running at roughly 29 mb/d in October, up from a low of 27.9 mb/d in April. OPEC’s official quota has been unchanged at 24.8mb/d since the start of the year. With demand still trying to catch up to supply, WTI oil could continue to trade in the $75 - $80 range. If oil prices break above $80 in the near term, a depreciating dollar may well be the culprit. Since these reports do not expect the dollar to decline significantly in the near term, the prospects seem highest for crude to remain below $80.

Silver prices could be volatile, holding above $18.00 this week. Last week silver prices rose 4.9%. Increased speculative activity and profit-taking may add some downward pressure on silver prices, but only for a brief time. Any downward correction is not expected to set the long-term trend in silver prices, however. Most investors remain bullish toward silver. Some are expecting prices to head higher still. A spike to $20.00 or even higher cannot be ruled out, given tight short-term market conditions and strong investment demand. Industrial users of silver continue to purchase silver despite high silver prices, based on expectations that demand for silver-bearing products will revive strongly in the near future. The world economic and political environment remains supportive of high silver prices. As a result, investors remain interested in silver either out of fear or greed. Institutional investors in Europe and North America have increased their purchases, while there also has been strong buying in Asian and Middle Eastern markets. As of 20 November combined ETF silver holdings reached a new record of 446.8 million ounces, up 11.1 million ounces on the week.

This week the Indian rupee could trade between 212 cents and 217 cents per 100 rupee, with an upward bias. The Indian rupee has been extremely volatile over the past several weeks, largely taking cues from movements in domestic equity markets. The Indian rupee jumped sharply to 217 cents early in the week, but then gave up most of its gains as the week progressed. The Finance Ministry of India last week stated that it had quantitative tools to control the disruptive inflows of foreign capital into the country, should it become a concern. This comment weighed, to some extent, on the rupee. However, at this point it has no plans to levy any such tax on foreign capital inflows. From the beginning of the year through 20 November the Sensex, which is the benchmark stock index of India, was up 71.9%.

The pound may fall toward $1.62 this week. The pound has shown resilience over the past couple of weeks, managing to hold above $1.64. Some of this strength may be due more to a weaker U.S. dollar than a stronger pound. The pound had been rising early last week, nearing $1.69, but after the Bank of England (BOE) monetary policy meeting minutes were released sterling began to head lower. Despite the unanimous vote to leave interests unchanged at 0.50% there were members who did not concur with the quantitative easing program increase of 25 billion pounds. One member voted for a larger increase while another voted for no increase at all. Speculation may increase over what the BOE does over the next several months if weak economic conditions persist.

The Japanese yen is likely to weaken this week against the U.S. dollar. Profit-taking coupled with technically based trading could push the yen toward 108 cents —110 cents.  Last week the yen traded in a thin range, moving slightly higher toward 112 cents. A large part of the increase in the yen reflected move to safe haven currencies amid the global economic slump and volatile financial markets. Japan’s economy remains haunted by the threat of deflation. Furthermore, there have been talks about the Bank of Japan pumping in additional liquidity into the Japanese economy. All of this is expected to weigh on the yen. Since a large part of Japanese foreign reserves are held in the form of U.S. treasuries, a rising yen would adversely affect the value of foreign reserves. The Bank of Japan kept its interest rates unchanged at 0.1%.