Gold continues to slide, with little buying appetite ahead of Friday’s European Summit

Gold continues to slide, with little buying appetite ahead of Friday’s European Summit. As pointed out slightly more than a week ago (see Commodities Daily dated 25 Nov 2011), there are two factors which are putting downward pressure on gold.

The first is weak EM currencies in general, and the Indian rupee (INR) in particular. The second is the funding stress in Europe.

We maintain that gold would reach record highs again in 2012, but the two above-mentioned factors could see gold lower. Physical demand is much weaker than it was six weeks ago. Much of the demand weakness is from India where the rupee has
depreciated by more than 7% since the start of November. This has pushed gold denominated in rupees to all-time highs this month. Even now, with gold coming off in dollar-terms, gold denominated in rupees is still very close to all-time highs.

As far as investment demand is concerned, funding stress, especially for European banks remains, as is evident from the Euribor/OIS spread which remains at elevated levels. We continue to believe that the dominant fundamental driver of gold is global liquidity, followed by real interest rates.

Gold support is at $1,708 and $1,694. Resistance is at $1,746 and $1,769.