Central banks of the world have finally made a choice in favor of economic stimulation at the expense increasing the money supply. Yesterday all the major central banks: FRS, ECB, Bank of England as well as Bank of Japan, Switzerland and Canada united their efforts in order to reduce the cost of dollar loans for the world’s major financial institution by 0.5% until Feb 1st 2013. It is equal to pouring more US dollars into the global financial system, which increases the inflationary expectations.
Yesterday these expectations caused a strong rally of numerous stocks and commodities, including gold and silver. The Gold/S&P500 correlation has been 0.7 over the last 25 days – the highest figure over the last 12 months. The taken step is expected to provide major foreign banks with a much easier access to dollars. However, this is not a solution to the key problem - the eurozone crisis – even though yesterday the bond yields of some eurozone states saw a slight decline.
In November the global investments in some bonds issued by eurozone members shrank from 27.4% down to 26.9%, mainly due to the outflow of the capital invested by British and US financial institutions.
US investors reduced the share of European bonds from 19.1 down to 17.6%, UK investors - 11.9% to 8.9%.
Yesterday Barack Obama stated that he was optimistic about the possibility of the US Congress agreeing to extend the term of lowered taxes.
The People’s Bank of China decided yesterday to lower the reserve requirements from 21.5 down to 21%. This is the first easing by China’s central bank since 2008. The step is explained by the fact that the world’s 2nd economy starts slowing down. CFLP’s PMI declined from 50.4 in Oct down to 49 in Nov. This suggests some production cuts initiated by China’s major industrial manufacturers. The New Orders index declined from 50.5 down to 47.8. This is the first reduction in the country’s industrial sector in 3 years.
Despite yesterday’s gold rally on inflation fears, some experts report that the physical demand for gold is rather low, thus concluding that the recent rally was of purely speculative nature. In particular, Hong-Kong dealers do not see any reason to buy gold at such a high price. They will wait till it declines at least down to $1700/oz. According to the World Gold Council, this year China is expected to import 750 tons of gold.
The implied volatility of gold options has recently declined down to the lowest value over the last 4 weeks. This suggests that the underlying asset (gold) may well keep consolidating in the range.
Forecast: According to the Department of Commodity Trading of , today gold prices will probably continue their consolidation after yesterday’s rally. The upward potential is restrained by 1760. A downswing below 1750 to 1742, 1736 (and probably 1730) looks more probable. In other worlds, the further succession of events in the market of gold will depend on these levels.
As far as silver is concerned, in order to continue the rally, it will have to overcome 32.9 and consolidate above 33.0. Without extra stimulation of demand the upward potential is restrained by 33.6. However, the following bearish scenario looks more probable: a test of 2.5; if it is a success, the price will go further down to 32.3 and 32.10.
