Gold: Bullish for medium term; support at $1700, resistance at $1803/oz
Gold prices have been caught between soft physical demand, the relative strength of the dollar, and muted risk appetite. Physical demand responded to lower prices but has failed to provide a solid floor while investment demand has strengthened with ETP holdings close to record levels and central bank net buying continues. Indeed, the macro picture remains conducive for further price gains next year, given negative real interest rates and fears over inflationary pressures.
Macro environment: Positive
–Under the Summit agreement, EU countries have pledged EUR200bn in additional credit lines to the IMF, which can be deployed in the near term through national central banks. According to Barclays, it will be provided similarly to the boost to the IMF’s lending capacity as happened in 2009.
– The ECB lowered official interests by 25bp, in line with Barclays economists’ and the consensus expectation. They had expected the Governing Council meeting to focus heavily on the provision of bank liquidity, and in this context, the decisions were bolder than anticipated. In particular, there will now be two three-year longer-term refinancing operations, and a halving of reserve requirements. The economic assessment remained downbeat, and our economists see a strong likelihood that the next set of staff macroeconomic projections will be revised down further.
–The European Central Bank’s denial of plans for more aggressive purchases of eurozone bonds hit risk sentiment and, in turn, weighed upon gold on Thursday.
–The decision by Standard & Poor’s to put 15 euro area countries, including all six AAA rated economies, on CreditWatch Negative has put a dampener on the mild recovery in risk sentiment.
–Economists with Barclays has lowered the 2012 global GDP growth projection from 3.7% to 3.3% as two headwinds – commodity price surges and the Japanese earthquake – have subsided, so a third – European financial risks – has emerged more forcefully. US growth is showing more positive sign, whereas they look for a European recession and a soft landing in China.
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