Gold has managed to hang on to the gains it made yesterday

Gold has managed to hang on to the gains it made yesterday, as the dollar remains weaker on the back of yesterday’s coordinated central bank action on dollar swap rates. However, Asian markets hardly reacted, with prices remaining relatively range bound overnight. For the most part, this range-bound trading has been extended into this morning, although we have seen
some gains induced by further dollar weakness.

The Dec-Feb spread blew out to $7 as concerns over year-end liquidity seemed to weigh on markets. This spread has however come back in as markets seem to be taking comfort in yesterday’s central bank action. We are not entirely convinced that liquidity problems in the Eurozone have been adequately addressed. To this end, we keep an eye on the 3m Euribor/Overnight swap spread, as a measure of the liquidity premium in Eurozone money markets. Unsurprisingly, this spread has jumped recently and is currently at levels last seen in March 2009. A liquidity squeeze would be detrimental to all commodities, even gold.

After yesterday’s exuberance over easing Chinese monetary policy and the coordinated action from global central banks, it appears that markets are realising the implications of these announcements, i.e. that the global economy must be in pretty dire straits to warrant such announcements. If this feeling gathers momentum, we could see gold surrender some of yesterdays gains, although for now, participants might be content to wait for tomorrow’s nonfarm payrolls for a reading on the strength of the US economy.

Gold support is at $1,715 and $1,683. Resistance is $1,765 and $1,782.