Gold trended downwards yesterday

Amid some volatile moves, gold trended downwards yesterday, once again leading the rest of the precious metals complex. There was a sudden sell-off in COMEX which pushed gold down to around $1,723. The pattern of movement in gold largely mimics that of the dollar, especially in relation to the euro. With the dollar holding its relative strength, it appears as if any upward momentum in gold, and the rest of the complex, will be a lot to ask.

Yesterday’s US consumer inflation came in below expectations, down 0.1% m/m (consensus: 0.0%). While this might be read as opening the way for more monetary easing (something that would benefit precious metals, especially gold) we prefer to focus on what it might imply about the health of the US economy. The short-term economic supply curve would suggest that
when inflation falls faster than expectations, output (in the short-run) should decline too. One data point is not a trend but we would read further price declines beyond expectations as a negative signal for short-term US growth. A weaker US economy could see renewed interest in safe-haven assets, such as gold and silver, which have been at a recent disadvantage to the
dollar.

Our Standard Bank Gold Physical Flow Index (GPFI) has once again dipped into negative territory today, indicating relatively weak physical demand. However, the same thing happened a few weeks ago and physical demand soon rebounded. We are confident that the same pattern will emerge as buyers in Asia return to the market at the current relatively low prices.
Gold support is at $1,746 and $1,735. Resistance is $1,777 and $1,796.