2011-05-26

Gold continue to gain as appetite for safe-haven assets is spurred by growing concerns over Eurozone debt


Gold continue to gain as appetite for safe-haven assets is spurred by growing concerns over Eurozone debt. In addition, yesterday’s disappointing Richmond Fed manufacturing data has once again brought into question the strength of the US economic recovery. The index which measures manufacturing activity in the central Atlantic region of the US, fell 6% m/m (consensus: an increase of 9% m/m), as shipments and new orders weakened.

This follows other US economic indicators on manufacturing that have disappointed over the past few weeks. It also follows indicators elsewhere, such as China’s industrial and manufacturing data, which shows a slowdown in growth. These are all bullish signals for gold, as investors’ appetite for risk diminishes. To this end, this afternoon’s US durable and capital goods orders data could have a bearing on commodities markets. Weaker-than-expected numbers would bearish for base metals, but if this should lead to some dollar weakness and a desire for safety, precious metals could benefit.

Currently, we believe that default by a Eurozone country is not fully reflected in commodity prices. The reason is that when working with sovereign defaults it is most likely that other markets will come under pressure, for example, the foreign exchange market. It is impossible to say with certainty what the effect on the euro will be if a default occurs, since this depends on external policy shocks. Our FX strategist believes that we have probably seen the peak of the euro/dollar in the next few months and that any rebound from here won’t see the euro above $1.50. As a result, rallies in euro/dollar should be sold as we focus in on the longer-term target of $1.20 a year from now.

On the back of slower growth data, the possible default/restructuring of Eurozone debt and the large policy risk that goes with it, we maintain our position that economic conditions favour gold.

Gold support is at $1,517 and $1,508. Resistance is at $1,533 and $1,538.

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