2010-12-14

Further tightening of monetary policy did not materialise

As anticipated, Gold lost ground ahead of the weekend close. After China’s move to raise bank’s reserve requirements investors began to move out of commodities in anticipation of the central bank raising interest rates over the weekend. However, this further tightening of monetary policy did not materialise, leaving many investors, particularly in Asia, caught short on their bets for a rate hike. Short covering has contributed to a rally in Gold.

Nevertheless, given that Chinese consumer inflation figures released over the weekend reached a 28-month high, the threat that the authorities will move to curb inflationary pressures remains. This was further enforced by a statement from the Central Economic Work Conference, affirming a commitment to a more “prudent” approach to monetary policy. Consequently, we expect more dips as markets react to developments on this front.

As highlighted on Friday, we believe that Chinese consumer prices will peak within the next few months. As such, the cycle of monetary tightening may already be at or near its peak. Consequently, we believe markets might be reacting too bearishly to the threat of Chinese monetary tightening.

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