Physical buying interest and a weaker dollar have managed to lift gold

Physical buying interest and a weaker dollar have managed to lift gold, and along with it. Once again, strong physical buying, especially out of Asia, helped curb momentum-driven selling that had pushed gold below $1,500. This confirms our tactical view that gold should be bought on dips below $1,500, as physical demand places a floor at these levels.

Yesterday’s reserve requirement increase by China’s central bank did not have much bearing on Gold markets. This is unsurprising, as we’ve highlighted previously my old posting reveals that of all the monetary policy tools the PBOC employs, reserve requirements have the most benign impact on commodities.

A slight uptick in US jobless claims figures and indications of growing business inventories, might have lent some support to the complex on raised concerns over the strength of the US economic recovery. Slightly worse-than-expected US producer inflation (6.8% y/y versus an expected 6.5% y/y) might have also renewed fears over rising inflation, and seen some inflationhedge
motivated buying. Better-than-expected Eurozone GDP numbers have seen a slight pullback in gold , as this has most likely increased confidence and dampened the safe-have appeal of the complex. As well as Gold in general if the dollar should weaken further.

US consumer inflation numbers this afternoon, could have some influence in that they might prompt speculation surrounding the Fed’s end to quantitative easing and raise inflation concerns. In anticipation of the release of the FOMC minutes next week speculation that the Fed may start to reduce the size of its balance sheet and drain liquidity from the economy will once again surface. When the Fed drains liquidity, it will be bearish commodities in general, but gold specifically. We don’t believe that the Fed will seriously contemplate tightening monetary policy before the scheduled end of QEII in June, especially given the benign inflation outlook and stubbornly high unemployment.

Gold support is at $1,492 and $1,470. Resistance is at $1,523 and $1,531.