2011-04-07

Gold continued to benefit from safe-haven


Gold continued to benefit from safe-haven demand through most of yesterday’s trade. Technical buying and short covering added further impetus to gold and silver prices as the New York session opened. With the re-opening of Asian markets, some profit-taking was evident as Chinese investors returned after two days of holiday. However, this was not enough to
significantly reverse gains. As anticipated, the negative impact on prices in response to the increase in China’s lending and deposit rates was short-lived.

However, in the long term, as the real economy begins to feel the affects of monetary policy (we find a lag of about 12-18 months), the effect on commodities should become evident. Amongst the Gold, it is platinum and palladium that are worst affected by tighter monetary policy in China (although base metals are affected far more). Whilst assuring that the Fed was unlikely to change the current asset purchase plan expiring in June, the release of FOMC minutes revealed an increasing polarisation amongst members. Some are calling for “exceptional monetary accommodation” to be extended beyond 2011, while others warn that inflationary pressures warrant tighter policy this year. As the deadline for QEII draws near, we foresee increased uncertainty and speculation among market players concerning the possible paths the Fed might follow, resulting in increased volatility in precious metals markets.

Gold support is at $1,438 and $1,420. Resistance is at $1,466 and $1,476.

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