2010-11-20

Gold continue to be bolstered by investor demand

Gold continue to be bolstered by investor demand, which in turn is supported by the weaker dollar. As it becomes more likely that Ireland will accept an EU bailout, fears over contagion spreading across the Eurozone’s debt markets are diminishing, improving confidence in the euro. As highlighted yesterday, buying in the physical market (especially in India) is
also playing a supportive role.

However, the brief dip in prices overnight, prompted by rumours of a Chinese rate hike, highlights the sensitivity of precious metals to news related to global liquidity. With the Fed’s QEII now largely priced in, focus has now shifted to the actions of the Chinese central bank. Of the policy tools available to the PBOC, credit rationing seems the most probable to be enacted. While this might create some friction in commodities markets, we still believe Chinese demand for commodities will remain largely intact. Thus, we remain bullish, especially on precious metals with significant exposure to Chinese markets, such as silver and palladium.

Gold support is at $1,340 and $1,326. Resistance is at $1,365 and $1,374.

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