2011-02-16

Gold have been buoyed by rising tensions and the threat of political instability spreading across the MENA region

Gold have been buoyed by rising tensions and the threat of political instability spreading across the MENA region. This has dampened appetite for risk and seen renewed safe-haven buying of precious metals. The lower-than-expected print of China’s consumer inflation has also emboldened investors as fears of monetary tightening (and consequently lower global liquidity) have eased.

However, we would caution that the threat of monetary conservatism in China is still very real. Yesterday’s new yuan loans data was particularly weak on a seasonally adjusted basis. In addition, producer inflation rose by 6.6% y/y, much more than expected and a sign of mounting pipeline inflationary pressures. As such, we believe that China’s monetary tightening is set to
continue and will remain a weight on commodities, although more so for base metals than precious metals. From an inflation-hedge perspective, precious metals received a boost this morning from UK inflation figures. CPI rose to 4% y/y (in line with consensus estimates), marking the fourth straight month of increase. This has raised investor concerns over the threat of global inflation, inducing demand for precious metals.

Gold support is at $1,358 and $1,350. Resistance is at $1,371 and $1,375.

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