Gold prices have moved significantly higher this morning as the dollar has softened

Gold came under pressure from a stronger dollar after a disappointing US consumer confidence reading dented investor optimism. Overnight, not much support was forthcoming from Asian participants. However, despite high prices, we have seen a resurgence in Indian physical demand, partly explained by an appreciating rupee. Base on Standard Bank Gold Physical Flow Index, after two days in negative territory is once again positive (indicative of net buying in the market).

Although relatively stable during Asian trade,Gold prices have moved significantly higher this morning as the dollar has softened. Momentum, though is lacking, without any strong conviction to buy—the preferred strategy remains to buy on dips. In line with last week’s data which showed a slowdown in Eurozone money supply and credit expansion, the recently released ECB report on bank credit standards has revealed a significant tightening of standards in Q4:11, with even more tighter controls expected in Q1:12. This does not bode well for money market liquidity in the region, and we feel warrants more attention than markets are currently paying.

We feel that a drying up of money market liquidity in the Eurozone remains a key risk to commodity prices (even precious metals) over the coming months. Gold support is at $1,732 and $1,718. Resistance is $1,755 and $1,762.