2011-04-19

Growing fears of rising inflation and a weak dollar continue to benefit gold


Growing fears of rising inflation and a weak dollar continue to benefit gold and silver at the start of the week. Inflation-hedge buying is providing the main impetus for gold and silver, although a reduced appetite for risk is also playing its part. Chinese authorities raised reserve requirements over the weekend (to take effect on 21 April), the seventh consecutive increase since October last year. The move was not surprising off the back of March price data released on Friday which revealed that a) consumer inflation stands at 5.4% y/y, the highest level since August 2008, and b) producer inflation which also came in higher than expectations (consensus 7.2% y/y) at 7.3% y/y, indicating strengthening pipeline inflationary pressures.

Gold and silver have shrugged off the promise of more aggressive Chinese monetary conservatism. The reaction of platinum and palladium is in line with base metals, and could be ascribed to concerns over industrial demand in China should authorities continue to tighten monetary policy. Moody’s downgrade of Irish long-term bank deposits could further increase interest in Gold, in that it might return nvestor focus to the Eurozone debt situation and the threat of financial contagion. However, given the current lack of interest in PGMs, we would expect gold and silver to be buoyed the most by this news.

While gold and silver seem to be enjoying support it is worth noting some changes in speculative activity. According to the most recent CFTC data, net speculative length for COMEX Gold declined marginally, ending three weeks of consecutive gains. Given that the changes in speculative positions were minimal, we would not take this as a signal of a market turning
bearish on gold as yet, but do consider it something to keep an eye on. The dramatic increase in short silver positions over the past two weeks and last week’s fall in speculative longs do raise concerns that markets expect a correction in silver’s recent rally; this has pushed prices to record highs.

Gold support is at $1,471 and $1,463. Resistance is at $1,489 and $1,497.

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