Commodities
The Gold Trade
We have been asked our view of gold. Several commentators are suggesting a rally in the price of the metal. Arguments range from a strengthening in demand from Asia and the Middle East due to increased economic activity in those regions to a hedge against current inflation trends. It is true that the price has risen over the past three years in line with improvements in real GDP levels in Asia and the Middle East. The economic outlook for both regions does appear solid, suggesting therefore that gold prices will remain buoyant. On the inflation front, the US, euroland and the UK are experiencing upside pressures, although they are more short-term in nature. Moreover, the Fed appears to be very much in control of the situation, judging by core rates. Gold has done very well over the past three years as the dollar has declined in value against the euro. However, we are now pretty bullish the dollar on a medium-term basis. As a result, the fundamental outlook for gold is somewhat mixed, which leaves us basically neutral at the moment. One thing we would say, though, is that demand for commodities in general – and especially oil and industrial metals – remains extremely strong, given the robust nature of the US and key emerging economies such as China and India. This will certainly underpin the value of the precious metal. Can the metal break above the recent high of US$456.50 per ounce? We are not sure. The first obstacle is resistance at the US$440.00 area. A close above this level on the weekly or monthly chart would suggest a re-test of US$456.50, a break of which would be very bullish indeed. On the downisde, key support comes in at US$420.00, an area that could well attract some good buying interest. So we will continue to watch the above parameters, and for a change in fundamentals, until a clearer picture emerges.
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