Gold continues to find good support

Gold continues to find good support, driven by the steady rise in investment demand. However, note that although physical demand out of India and Asia remains positive, interest in gold has slowed from the very high levels observed when gold was below $1,200.

Data releases are light this week. We therefore turn to financial markets. Specifically, developments in the inflation-linked bond market. The 10-y US TIPS (inflation-linked bond) yield is just below 1%. This shows that the market currently expects real long-term interest rates to average around 1% over the next 10 years. While TIPS yields may be slightly distorted by liquidity, the current yield is at levels last seen in early 2008 (just before the Lehman collapse). The low TIPS yield is also consistent with the Taylor rule (the Taylor rule indicates where the Fed may set US interest rates by balancing the Fed's two major targets: inflation and unemployment). According to forward-looking estimates of the Taylor rule, rates seem set to remain very low into 2012. Low real interest rates implies higher liquidity. Greater liquidity over a long period supports commodities.

We find that precious metals, gold specifically, the main beneficiary of higher liquidity. Gold support is at $1,211 and $1,207. Resistance is at $1,222 and $1,228.

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