2011-04-06

Gold shrugged off fears over an earlier monetary tightening in the US


Gold shrugged off fears over an earlier monetary tightening in the US, and continued to climb yesterday. The support for prices is largely attributable to persistent global uncertainty in the form of the ongoing conflict in Libya (and unrest in other parts of MENA), a renewed focus on the European sovereign debt situation (Moody’s has most recently downgraded Portugal’s sovereign rating), and a stronger oil price (Brent is back at $120) that has stoked fears over global inflation.

Bernanke’s comments that the Fed views the increase in inflation driven by commodity prices as transitory is good from a liquidity perspective, as it implies that the fears over an earlier exit from the Fed’s monetary accommodative stance are unwarranted. The downside is that this might deter Gold buying by investors with an inflation-hedge motive. For now, we
believe that the liquidity view still dominates, and together with the MENA political tensions and Eurozone fiscal issues, should continue to support Gold.

Today’s increase in China’s lending and deposit rates will most likely prompt some knee-jerk selling of Gold. However, we maintain that this is temporary, with the true negative effects on commodities only evident in 12-18 months, when monetary policy actions start to impact on the real economy. In addition, base metals feel the impact far more than Gold. For the rest of today, markets will be looking to the release of the FOMC minutes this afternoon, for any change in the Fed’s inflation outlook or monetary policy stance.

Physical buying in gold and silver is still evident on dips, which is placing a limit on any downside.
Gold support is at $1,427 and $1,420. Resistance is at $1,441 and $1,447.

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