Gold remains under pressure

Gold remains under pressure. We see a growing risk of the metal testing its 200d MA soon. Physical demand from India and South East Asia has picked up, with gold below $1,670. However, the pick-up in demand is from relatively low levels, and overall demand remains well below levels seen in October. Currencies such as the Indian rupee continue to weaken against
the dollar, hardly helping lacklustre demand. Weaker buying appetite is also reflected in the Shanghai physical premium relative to spot gold which was at $3.00 this morning — down from the levels of $15+ seen in October.

The potential downgrade for Eurozone countries are also hovering over the Gold market. The biggest immediate risk to the gold price 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.

Key support for the metal lies at its 200d MA at $1,618. Since early 2009, gold has consistently bounced off its 200d MA. Unless funding issues in Europe deteriorate substantially (from current levels), we expect this support to hold. Apart from the 200d MA, support is at $1,660 and $1,654. Resistance is $1,711 and $1,742.