Interpretation of QEII still look at gold

The market still focuses on QEII. Investor commodity interpretation of QEII still look at gold. They believe the gold market is pricing $500bn of QEII already. Our estimates are based on gold's close relationship since 2004 with global liquidity of which the Fed's balance sheet makes up an important component.

We find a gold price closer to $1,280 would be consistent with no additional QE. This is roughly 4% lower than current price level. Investor are confident the Fed will announce more QE. Therefore, until 3 Feb we see $1,280 as a floor for gold and any price dips in gold should be bought. We believe the Fed is unlikely to do $500bn in one go. As our G10 macro economist points out, the Fed should prefer smaller amounts every month, with the time frame largely dependent on the underlying US economy. This should focus market attention away from monetary easing towards the macro economy.

With gold falling below $1,330 physical demand for gold has picked up markedly since the start of the week. Buyers in Asia and India in particular should continue to buy these dips ahead of the end of Diwali on 5 Nov.

Gold support is at $1,315 and $1,305, while resistance is at $1,329 and $1,339.

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