Oil and gold to remain attractive for investors: year 2011 doesn't look very promising-II

Though Asia may have a different story to tell, which is projected to grow around 4.5 percent, the ongoing economic weakness in the US and Europe is likely to prolong. The Federal Reserve has signalled that it may continue to opt for low interest rate policy for an extended period of time, which means interest rates to stay at current levels and if required the FED could go for third time quantitative easing (QE-3) for continuation of growth.
It is expected that the current FED's monetary stance would give some boost to the housing sector and export led growth and may improve the overall job conditions. Quantitative easing and zero interest rate policy in the US have pulled its economy out of a recession but are not providing the spring to give the requisite timely bounce-back. Despite two-QE's, the US unemployment rate still hovers around 9.8 percent. The negativity is that US economy needs to put its fiscal position in order by increasing taxes and reducing expenditure on social security, medicare and defence.
Jitters about sovereign debt crisis will dominate the European market. Though, the problem has temporarily thinned down due to financial bailouts, increasing debt remains a big headache, forcing fiscal tightening. This will slow the pace of European growth for a long time.
Growth in Chinese economy will be high in the 1st two-quarters of 2011 due to lagged effect of massive monetary expansion in 2008-09. Inflationary pressure is creeping up and growth in its CPI has reached a worrisome level, which means more tightening and strengthening of Yuan looks a possibility, as policy makers are focused on fighting inflation aggressively, which could taper growth prospects.
However, quite a few Asian developing countries are better placed due to continued strong growth and are enjoying strong forex reserves position. They may be forced to take measures to curb foreign currency inflows by imposing taxes and shift their monetary stance to neutral, or even go for mild tightening.
GOLD - $1421 I am cautiously bullish on gold, as large deficit in the USA and Japan and sovereign debt and fiscal problems in Europe provide immense support to the metal. I would still wait at current levels because reports of liquidation by large funds may provide excuse for long awaited correction.
With continued zero interest policy and Quantitative Easing (QE), commodity market gets a big boost and so does gold, as QE money is flowing into that territory. China and India are bullish on gold and demand emanating will continue to provide support to gold.
Preferred buying area for gold is around USD 1350, as technically support is at USD 1310 and only a downside break of USD 1270 will risk a further sharp fall. On the upside a break of USD 1487 is required for the continuation of a bullish rally, which would pave way for USD 1550. However, I am expecting excessive volatility in the price of gold and large swings can be seen. What I fear most is that failure to penetrate USD 1487 would lead to a sharp drop in the value of gold.
OIL - WTI $91.80 I remain bullish for oil, population, growth and lack of alternate, genuine demand for oil will stay. There are no new oil finds that can provide help to soften the oil price. Canadian (shale oil) or Brazilian oil finds off its coast will take time to reach the market as such demand pressures will persist.
The Western economies are witnessing a slowdown, but they are still the largest consumer of oil. Despite lower growth, demand for global oil inched up in 2010, rising by 2 million barrel to 88.1 million barrel. The global growth projection for 2011 is better than last year's that argues for more demand for oil. Opec supply was 40 percent of the global oil. It has already stated that they are comfortable with the current price level and they do not think that increase in oil production is necessary.
Production fundamentals, of the industry and demand indicate that oil production will not increase and gradual price hike will be seen. Hence, any dip in oil prices would be opportunity to buy cheap oil. Technicals are also supportive for higher oil price. We believe that oil will hit USD 118 in 2011 and during the year oil should average around USD 95 levels. Oil has strong support at USD 87 and then at USD 83, but USD 78 is the key level, which unlikely to surrender.
MAJOR GLOBAL CURRENCIES EURO - 1.3310. Euro zone will remain a troubled area. Greece, Ireland, Spain and Portugal are at trouble spots. But as long as Germans are willing to support them - PIGS Euro will survive. The problem is that Germans have special liking for Euro and Euro is too strong for the weak European economies from a growth perspective. Contagion is another factor that Europe's weaker economic partners are facing. However, as long as the European economies get support from EU and IMF, it will protect them from going bust.
Meanwhile, US economy has started to show sign of recovery, as unemployment has dropped to 9.8 pct, the consumer sector has shown growth and if the current trend continues the US economy is expected to grow at a better pace. This will help USD to stabilise and Dollar would gain strength.
The big question is that if US economy recovery is sustainable, which may not happen, resulting excessive currency moves both ways. We believe that Euro doesn't have enough legs to penetrate 1.3820 and a break of 1.2890 would confirm a test of 1.2475, a break here would see a retest of 1.2090. Only Upside break of 1.4280 negates my view.
STG - 1.5465 Investment mood in UK is not very cheerful. Inflation pressure is mounting due to higher taxes and soaring food prices causing a breach in government's inflation limit of three percent, which could make 2nd round of quantitative easing difficult unless UK's economy deteriorates severely. Signs are obvious that UK economy is still facing inflationary risk and the problem faced by Bank of England is that higher rate could hammer its housing market and its economy is largely dependent on the housing sector.
Recently, UK's coalition government survived the students protest over tuition fee. Government debt is not getting better that could also hurt the coalition partners' relationship, so any political unrest could become a reason to call early UK election.
In my view, after enjoying a good period of stability Sterling could come under pressure in the 1st quarter and could test 1.4820, which is the key level. It should not surrender or else sterling will fall to 1.4280. Instead I am looking for a bounce back and push beyond 1.6240 may not be very surprising in the beginning of 1st half of 2001.
YEN - 81.45 Meanwhile, Japan has once again become world's second largest economy overtaking China due to stronger Yen. Strong Yen is hurting its exports and has few economic risks as well. In terms of growth it is likely to be the worst performer amongst the developing countries. Correction in Yen is overdue but the currency is unlikely to lose much of its gloss due to European debt risk and fewer avenues. Market will once again forget Japanese woes, as European crisis would start dominating currency market, so buyers of Yen will push Dollar to 76.80 in this quarter. 1st resistance is at 85.80 with major at 89.50. However, it is suggested profit should be taken at 76.80.
Concluded