2011-01-21

Chinese growth results would presage further tightening of monetary policy

As anticipated US housing data had a significant effect on precious metals. Housing starts during December fell by 4.3% m/m, to 529k, marking a one-year low. This has reignited fears over the strength of the US recovery prompting increased safe haven buying as investors fled from risky assets. The attendant dollar weakness further enhanced the attractiveness of group.

However, this boost proved to be short-lived as precious metals came off overnight on speculation that Chinese growth results would presage further tightening of monetary policy. These concerns were confirmed by the subsequent release of surprisingly good growth figures for China. Real GDP growth for Q4:10 came in at 9.8% y/y (consensus: 9.4% y/y), higher than Q3:10 growth of 9.6% y/y. While consumer inflation looked to be moderating (4.6% y/y in December) an acceleration in Chinese economic expansion might signal a strengthening of inflationary pressures raising the likelihood that authorities will have to respond.

This threat of Chinese monetary tightening is weighing heavily on all commodities. Should US data flow out the afternoon disappoint this could provide the impetus to turn around this downward. Jobless claims, home sales and leading indicators data, are due for release today and will be closely watched for any signs of further weakness in the US economy.

Gold support is at $1,367 and $1,365. Resistance is at $1,371 and $1,374.

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