2010-10-12

The precious metals markets remain range-bound

The precious metals markets remain range-bound since Friday afternoon, with very little interest coming from the physical market for gold and silver at current price levels. Much of the current strength for gold is still founded in the belief that the Fed will announce more quantitative easing at the start of November. Using the relationship between global liquidity (of which the Fed balance sheet constitute a large portion) and the gold price, we estimate that the gold market is pricing in an expansion of the Fed Balance sheet by another $500bn.

We also find a gold price closer to $1,260 would be consistent with the Fed not announcing any QE during the first week of November. While we remain cautious of gold at current price levels, we believe the metal should still find support into 2011. The IMF/ World bank conference over the weekend led to no solution on the currency wars between major economies. We believe that
the beneficiary is gold.

Central Bank purchasing of gold continues. The latest country to announce an increase in gold reserves is Russia which bought over 100 tonnes of gold from domestic supply. The volume of gold bought is small compared to the larger gold market but the signal to the market is strong — central banks aren’t selling gold anymore.

Gold support is at $1,330 and $1,315. Resistance is at $1,355 and $1,365.

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