Gold is finding good support on approach of $1,560

Gold is finding good support on approach of $1,560. Market activity for gold remains unchanged from yesterday - with the metal below its 200day MA at $1,620 we expect the metal to struggle. We also expect this 200d MA to provide resistance now.

We note that while we expect resistance to a rally the next few days, we still believe the metal will move higher in early 2012 and record all-time highs once again. Physical market demand continues to improve. The demand is not stellar, but much stronger than a week ago. This stronger demand from Asia is reflected in the SGE premium over spot which moved from around $3/oz at the start of the week to $10/oz this morning.

With the possibility of S&P downgrading a number of European countries, we would be surprised to see substantial buying activity within the next few days. The biggest immediate risk to precious metals in general, and gold in particular is not the actual downgrade, but as with the downgrade of the US, a further rise in global economic uncertainty and policy risk. In an environment where confidence is fragile already, the liquidity premium may rise further, especially in Europe, which would be bearish for gold. Also, we would expect the euro to weaken more relative to the dollar, which in the short term would impact on gold and other precious metals negatively.

We believe gold should find support within the $1,510 to $1,560 range. Gold support is at $1,565 and $1,550.