2011-06-16

Global liquidity conditions are bullish for gold

Yesterday, Gold continued to be buoyed by Eurozone debt concerns and the threat of rising global inflation. As anticipated, the hike in Chinese reserve requirements did not prompt much of a response in precious metals prices. Inflation fears were further heightened by higher-than-expected US producer inflation data. Steady physical buying in Asia provided support for gold and silver overnight.

This morning, Gold have lost ground on the back of a stronger dollar. The failure of European officials to agree on a rescue plan for Greece has placed downward pressure on the euro, and sent investors to the relative safety of the dollar. Nevertheless, we view this downward pressure as limited since inflation fears and Eurozone debt concerns will most likely resurface and should once again see investor interest in Gold return.

This afternoon’s US consumer inflation figures will most likely prompt a response on Gold markets. However, over the long term, we do not view inflation as a causal driver of the gold price, but rather see liquidity as the most important factor. Despite strong government borrowing and loose monetary policy (i.e. liquidity), inflation has remained largely in check over the past 12 years. Therefore, in the long run, gold has risen independently from inflation, driven largely by liquidity. Consequently, we look to liquidity, not inflation, to determine the future path of gold. We maintain that global liquidity conditions are bullish for gold.

Gold support is at $1,510 and $1,504. Resistance is at $1,525 and $1,533.

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