Brokers' Notes: Gold likely to gain again

Gold

Gold was on course for a third consecutive day of gains on Wednesday, supported by US dollar weakness and physical buying, while platinum hit a 30-month high, buoyed by an improved economic outlook.

The euro currency rose to a one-month high against the US dollar on Tuesday, after strong data out of Germany, the euro zone's leading economy, lifted the economic outlook for the region.

Upbeat economic data from the US and Europe in recent weeks suggests the global economy has gained a steadier footing, boding well for industrial metals as well as precious metals with industrial uses, including silver, platinum and palladium. 

US dollar and basket of currencies

The US dollar slid to a two-month low against a basket of currencies on Wednesday, as continued short-covering in the euro helped spur a broad fall in the dollar. 

Talk of Asian central banks buying the euro and the Australian dollar weighed on the US dollar, which was also pressured by selling by Japanese exporters, traders said. 

The euro remained supported after having risen on Tuesday, when it attracted demand from Middle East accounts and gained a lift from an upbeat German ZEW investor sentiment report. The single European currency rose 0.4 percent to $1.3439 close to a one-month peak of $1.3467 hit on Tuesday.

Indian rupee

The Indian rupee extended gains for the second straight day, tracking Asian peers and some dollar inflows, but strong US dollar demand from state-run banks on behalf of oil importers kept a lid on the rupee's upside. Choppy domestic stocks kept the rupee in a range.

Indian shares flip-flopped in early trade, underpinned by firm Asian markets.    Foreign funds are net sellers of $710 million worth of shares in the year to Monday after pumping in a record $29.3 billion in 2010.

Indian inflation

Reuters poll suggest that India's uncomfortably high inflation will subside only gradually in the coming quarters as the economy continues to race ahead, likely prompting the central bank to hike interest rates more aggressively than earlier thought.

The wholesale price index (WPI) India's main inflation gauge, is expected to rise by an average 8.8 per cent for the fiscal year ending March 2011 before easing to 6.4 percent in the following year.

This is considerably higher than 8.3 and 5.7 per cent forecast in the October survey. Many economists now believe the Reserve Bank of India (RBI) will be forced to undertake much swifter policy tightening than was previously foreseen.

The Indian economy is still set to grow at the same robust pace seen over the last fiscal year, averaging 8.7 per cent in the year-ending March 2011, before moderating slightly to 8.5 per cent in the following year.  

Sterling

Sterling extended gains on Tuesday, hitting an eight-week high versus the US dollar after a surge in consumer price inflation fuelled expectations that UK interest rates may need to rise soon.

Rising oil prices drove annual CPI growth up far more than expected in December to an eight-month high of 3.7 per cent, data showed, well above the Bank of England's 2.0 per cent target.

Sterling was boosted as the figures added more fuel to speculation that the UK central bank may have to raise rates which have been chained at a record low 0.5 per cent as early as May. Higher inflation deepens the dilemma of the BoE, as a rate rise in the near term may choke off the country's economic recovery, particularly as the impact of government austerity measures is expected to kick in this year.

As a result, many analysts argue that the BoE is unlikely to raise rates in the coming months, which could further worsen its market credibility as price risks ratchet higher.

Oil

Crude rose above $91 a barrel on Wednesday, boosted by a fall in the dollar to two-month lows, while Brent crude ranged from steady to firmer after overnight gains. 

The discount for US crude futures' benchmark West Texas Intermediate (WTI) against Brent remained strong at more than $6 a barrel, but below the $8 level hit before the February Brent contract expired last Friday. 

But gains in WTI crude will be capped by the impending restart of Alaska's main oil pipeline after a shutdown, as well as a suggestion by the International Energy Agency that Opec may have raised output in response to high oil prices. On the other hand, Brent prices remain supported by worries over disruptions in North Sea crude supplies. 

Source: Richcomm Global Services, DMCC, Dubai; www.richcommglobal.com