2011-04-08

Gold buying as an inflation hedge


After a relatively lacklustre trading day in New York, Gold ran into some selling at the open of Asian markets. Platinum and palladium were the hardest hit, with fund liquidations suspected on both NYMEX and TOCOM. For the most part though, Asian trading volumes were light as participants took to the sidelines in anticipation of today’s ECB rate decision.

Other global markets will most likely follow suit, with not much activity expected as participants await the ECB decision later today. It is widely expected (given the explicit signals from the ECB) that rates will be hiked by 25 bps, therefore, the actual decision should not spark much activity. However, the tone of the announcement will be looked at for an indication of whether this is a one-off or forms part of continued policy of monetary tightening. The latter might raise fears of future inflation and contribute to some Gold buying as an inflation hedge. In addition, sings of further rate hikes in Europe could lead to some dollar weakness against the euro, lending further support to Gold prices.

With Portugal in the face of record high borrowing costs now seeking a bailout from the European Union the threat of sovereign debt contagion in the Eurozone should keep investors sufficiently interested in the safe-haven aspect of Gold. Once the ECB announcement is out of the way, this should provide the potential for further upside.

Gold support is at $1,451 and $1,445. Resistance is at $1,463 and $1,468.

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