2011-05-20

Gold gained some upward momentum as fears of an early exit to monetary stimulus evaporated


As anticipated, yesterday's trade was characterised by choppy price moves as investors grew anxious ahead of the release of the FOMC minutes. After the release, Gold gained some upward momentum as fears of an early exit to monetary stimulus evaporated. The Fed reiterated its stance that a slower than anticipated recovery, a still weak (although improving) labour market and inflation increases that it viewed as transitory did not necessitate a reconsideration of planned monetary accommodation. The minutes also revealed that FOMC members were nearing agreement on a possible sequence for an exit strategy.

However, it was stressed that this did not mean that monetary tightening “would necessarily begin soon”. The majority of members it appears prefer the first asset sales in order to drain liquidity to occur after the first rate hike. Afterwards, assets sales should follow a pre-announced, although adjustable (dependent on close monitoring of inflation), path. We feel that even though the Fed’s quantitative easing programme is likely to end in June, global liquidity will continue to grow as a result of government borrowing. Consequently, support from a liquidity perspective should remain in place for gold.

Gold support is at $1,482 and $1,476. Resistance is at $1,497 and $1,506.

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