Dubai Gold & Commodities Exchange Weekly Market Views - September 19, 2010

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).

WTI oil prices could move between $71 and $76 this week. Last week crude oil prices declined to $74 after the Canadian pipeline operator Enbridge indicated that it would restore the flow of oil to its 670,000 barrel per day pipeline by Friday 17 September. The pipeline, which handles roughly 3.5% of United States crude oil consumption, was shuttered the previous week after a leak was discovered along its route in the Midwestern United States. A buildup in short positions also contributed to the downward momentum in crude oil prices. The contract roll may provide support for prices this week, but seasonally weak demand for crude in the United States is expected to weigh on prices in the near term. Prices may take cues from EIA crude oil inventory figures available this week for insight into how significantly United States inventories were affected by the recent pipeline shutdown. Any deviation from expectations could provide direction for crude oil prices.

This week silver prices are expected to rise above levels seen last week, possibly toward $21.50. The sharp increase in silver prices last week could result in some profit-taking, however. Any weakness in price is expected to be used as an opportunity by investors to enter the market. Combined silver exchange traded fund holdings reached 499.98 million ounces on 16 September, a record high. This is an increase of 1.47 million ounces over levels seen on 10 September. The positive sentiment regarding silver among investors is reflected in the continued increase in silver ETF holdings even at high prices. This positive sentiment is rooted in the expectation of increased fabrication demand for the metal going forward and that many investors consider the metal a store of wealth, similar to gold. The use of silver in solar panels and electronics is expected to boost fabrication demand for the metal over the next several years. Investors are purchasing the metal now to benefit from the rise in prices resulting from this increased fabrication demand. Shorter term investors meanwhile are purchasing the metal as a hedge against any potential deterioration in the global economic climate.

The rupee is forecast to head higher, toward 221 cents per 100 rupees, this week. The Reserve Bank of India (RBI) increased interest rates for the fifth time this year last week in an effort to curb high levels of inflation. The RBI at its policy meeting on Thursday set the repo rate, which is the rate at which the central bank lends to commercial banks, at 6%, up 25 basis points. It also increased the reverse repo rate by 50 basis points to 5%, which will help reduce the money supply since banks will be more willing to lend to the RBI. Inflation in August was 8.5%, down from 9.8% in July, but still unfavorable for monetary authorities. The RBI expects inflation to decline to 6% by the end of this year. Equity values rose sharply last week. The Sensex rose 423 basis points, breaking above 19,000 for the first time since January of 2008.

The pound may move lower, toward $1.54, this week. The pound rose above $1.57 last week following the release of inflation data that was higher than expected. The United Kingdom consumer price index grew 3.1% year-on-year in August, higher than a forecast of 3.0%. The pound also strengthened on the possibility that the Federal Reserve may increase its asset purchasing program in the near future. Although the Bank of England minutes, to be released this week, are unlikely to reveal significant change in the central bank’s loose monetary policy, several economic data points available early this week could provide direction to the pound. If concerns surge regarding the economic recovery in the United Kingdom, the pound may head below $1.54.

The yen could head lower, toward 115 cents, this week. The Japanese government sold an estimated two trillion yen last week in an effort to suppress the value of the currency, which had been strengthening since early June and had appreciated around 11% until the government intervention. This was the first time such action was taken in the currency markets by the Bank of Japan (BOJ) since 2004. The BOJ is not expected to drain the additional money flow into the market anytime soon. The yen had risen above 120 cents by Wednesday 15 September before falling to 116 cents by Friday. Market participants are likely to be cautious about taking a strong view toward the yen's direction in the near term. Investor could take a backseat until prospects for additional easing measures by the BOJ become clearer.