Gold is back above $1,700/oz

Gold is back above $1,700/oz. While some support for gold is coming from the weaker dollar, we view FX moves as only a short-term factor influencing gold. This is evident gold has traded at levels anywhere from $600/oz to as high is $1,800/oz for the euro/dollar at $1.38 (red line).
Clearly, there must be something else driving the metal in the long-term. This, we believe, is predominantly global liquidity and, to a lesser extent, real interest rates.

We note that global liquidity should continue to grow as long as (1) governments increase their nominal debt burden and/ or (2) central banks, such as the US Fed, implement quantitative
easing measures. In 2010, global liquidity grew 16%, in 2009 by 9.2% and 2008 by 28%. We believe that global liquidity would likely grow by 20% in 2011 and 18% in 2012. We do not argue other factors such as fx moves, credit risk and equities influence gold in the short term. But we view these factors as only short-term influences. We therefore judge the long-term value for gold relative to where global liquidity and real interest rates dictate gold should be.

Accordingly, our view is that the gold price will push higher in 2012 amid the growing risk of a recession in the EU and the US and given that the US Fed appears to committed to an
accommodative monetary stance. This should ensure that interest rates remain low well into 2013. We continue to believe gold will push higher into 2012.