Gold - At these price levels we’ve seen an interest in the physical market pick up

After an early morning recovery from the previous day’s rout, gold struggled to hold onto upward momentum yesterday, trading for the most part in the $1,710 to $1,725 region (a notable exception was the New York open which saw prices plummet to $1,705). The tentative investment demand is in contrast to the physical buying we’ve seen. At these price levels we’ve seen an interest in the physical market pick up, particularly from Asian buyers.

Friday morning we’ve seen continued dollar strength, with the rate against the euro slipping below the 100 day moving average. This is weighing on the precious metals complex. With not much in terms of data flow today, we maintain a bias towards downside, as the dollar strengthens and markets continue to reposition after revising their expectations for liquidity growth downwards, i.e. the assumption that there will be no QE3 from the Fed and no further ECB LTRO’s. While we concur with this view, we remain bullish on gold over the long term — we maintain gold will reach new highs in 2012, probably towards Q3. Our view on gold has never relied on further extensions to central bank quantitative easing programs.

Gold support is at $1,698 and $1,680. Resistance is $1,730 and $1,744.