Continued to see lacklustre physical gold interest

In overnight trade in Asia, we continued to see lacklustre physical gold interest, and even some scrap gold and silver coming to market from Japanese recyclers — nevertheless, prices held steady. This opened the way for renewed buying interest this morning off the back of a weaker dollar and renewed optimism as concerns over the Eurozone debt crisis have eased. PGM received an added boost from Japanese vehicle production figures for December, which grew 13.4% y/y.

As we enter month-end, a lot of headlines are underscoring the strong year-to-date performance of precious metals (and commodities in general). Gold is set to have the best January since 2008, while silver is poised for a record January return of the past three decades. Platinum and palladium are up 15.8% YTD and 5.7% YTD, respectively. Some are even declaring resurgent industrial demand as the reason for these gains in silver and PGM. We are sceptical, and the think the reason as more to do with the expectation of growing liquidity, with last week’s dovish announcement by the Fed the primary catalyst.

We still feel that the risk to commodities during Q1:12, are more to the downside. It is too early to expect real demand to support higher commodity prices. The lack of a strong pick-up in the physical markets, even after recent commodity price declines, indicates that growth will remain slow in Q1:12. Another major risk in our view is a stronger dollar, especially against the euro, as the Eurozone continues to struggle to solve its fiscal problems.

Gold support is at $1,725 and $1,709. Resistance is $1,749 and $1,756.