Gold continued their recovery yesterday

Gold continued their recovery yesterday, with momentum building towards the latter half of the trading day. A Wall Street Journal article suggesting that the Fed might be contemplating alternative forms of easing (other than conventional quantitative easing) helped give precious metals, gold and silver in particular, some added lift. It is reported that the central bank is considering sterilised bond purchases and/or requirements placed on sellers of any bonds to Fed as to how the funds can be used. We don’t anticipate that the Fed will announce any change to policy at next week’s FOMC meeting. Nevertheless, as we move closer to the meeting, volatility in gold and silver prices is anticipated.

Underscoring the vulnerability of precious metals to expectations of monetary policy, we saw some speculative buying in Asian trading emerge on a rumour that China was going to cut the reserve requirement ratio. These rumours soon subsided, and along with them the support they had provided for gold prices.
The main focus today will be the deadline for the private sector involvement agreement (20:00 GMT). Expectations are that the take-up will be sufficient to allow the debt swap to proceed without any activation of the collective action clauses (we hold this same view). These expectations have kept the euro buoyant so far today, and as a consequence have helped gold extend the upward momentum of yesterday.

However, we must highlight the vulnerability of these gains to any speculation or rumour as the deadline approaches. Gold support is at $1,686 and $1,670. Resistance is $1,703 and $1,704.