The uncertainty over the US interest rates was answered this week, when the FOMC decided to hold the US interest rates after the latest release of economic data suggesting cooling of the US economy. But they warned of further hike in the interest rates, depending on the economic data. This is what the markets were anyway expecting and the US dollar did remain range bound, but future uncertainty over the US interest rates would mean continued high gold forwards, assuming the lease rates at the shorter end to be liquid. This would deter the gold refiners to short gold and cover the same back by buying or delivering it. They would rather book outright forwards, given they are high. This would lead to an increase in the gold prices fundamentally. As far as the markets were concerned, I believe it went short after an almost six-million oz reversal from short to long positions as per the last COTR futures and options report describing the speculative interest in the markets. They came to cover their shortpositions, which could have been one of the reasons for the spike in the later part of the week.

Secondly, and this would continue to play an important role in probably all the future balance sheet reporting dates, was the refiners coming to close their short positions in the markets. And they would do this for the purpose of decreasing their hedge positions on the reporting dates, to show lesser volatile positions. Thirdly, the stability of the crude oil prices at the higher levels, in spite of the Opec output hike, also served to support the gold prices. And lastly, there was apparently physical demand at $284 an oz levels, as it was expected to stabilise there. But the later part of the week again showed a spike in the prices, which could lead to further unstability. Gold, in my opinion, has rallied on unimpressive volumes and is unable to break the $295 an oz level, for the second time in the last two weeks. Rallies are taken as supply sources to book profits, but appreciably the supports is showing strong physical buying as well as short covering.

And the price increases are increasingly due to short covering as the lease rates have firmed up to 0.65 per cent from a negligible 0.20 per cent, in the very recent past. This would increasingly point to borrowing the gold to short it and if the stop loss is triggered, cover your losses or take profit by buying back the same. Gold stands up pretty well compared to other commodities as a possible investment instrument and should command the attention of fund managers looking to invest, according to Robert Ellis, managing director of Tiger Management LLC. Gold's large inventories that overhang the market and stern competition from other commodities vying for the same position in portfolios may limit gold's success at winning over investors, Ellis said. Speaking to delegates at the 23rd Financial Times gold conference, Ellis said gold possessed the necessary attributes to grab the attention of hedge fund managers.

Ellis noted gold had what he termed "future volatility" - the expectation of future price movement, either up or down, which would allow investors a potential return. Gold also had the necessary liquidity so players would be able to commit transactions with relatively low market impact. The gold market also had low execution costs - meaning there were no extra costs to be borne once the decision to exit the market had been made. Ellis noted that gold lacks "a compelling fundamental story" because of the huge inventories that overhang the market, Ellis argued that few other commodities had such a known surplus, which may dissuade certain would-be investors.

Central banks are likely to remain sellers rather than buyers of gold, according to several speakers at the same conference. After the market's initial welcome for the European banks' September 1999 Washington Agreement to limit sales and loans of gold, sentiment had changed with the realization that the limits set implied an increase in official sales, and "disinvestment from gold may prove to be an ongoing process for central banks." Given its poor price performance and poor interest income, gold will once more be forced to justify its place as an important element of global monetary reserves.

The author is a fund manager. The opinions expressed, do not, in anyway, reflect the corporation's views, and are solely that of the author. This is not intended as an offer or solicitation to buy or sell, or methods to trade