Gold continues to trade around the $1,350 level

Gold continues to trade around the $1,350 level. In the physical market buying on dips prevail. We expect this trend to continue into January. However, we also believe the gold market is pricing the Fed QEII action already. We use gold’s causal relationship with liquidity to determine what the market is pricing already — we estimate that a gold price around $1,375 fully price a QEII program of $600bn. As a result we need either greater sovereign credit problems out of Europe, combined with bond buying by the ECB, or further dollar weakness driven by events other than QEII, to push gold much higher.

Given that further sovereign credit problems in Europe at this stage appear the most likely scenario, we believe gold in euro-terms may outperform gold in dollar-terms.

Gold support is at $1,340 and $1,330. Gold resistance is at $1,365 and $1,375.

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