Low Interest-Rate Environment Supports Gold’s Uptrend

Precious metals retreated on Monday as the strong rally last week triggered profit-taking. Yet, investment demands are expected to remain strong as global economic outlook remains uncertain. Speculations for further easing measures from various central banks should sustain recent uptrend in the complex. Crude oil pulled back before buying interests emerging at 80.77 sent price back above 81. Strength in Asian equities failed to carry to European session as Eurozone’s PPI grew less than expected, upstaging improvement in investor confidence. European bourses are down 0.2-1%.

Gold dipped after reaching a record high of 1322 last Friday. Currently trading at 1316, the benchmark contract has only slipped -0.5% from the unprecedented level. We actually favor a more meaning correction so that the upmove will be more healthy and sustainable. In the long-term, gold’s uptrend would remain intact as macroeconomic uncertainty persists and global interest rates will stay lower for longer.

Apart from the Fed, the market expects the BOJ will announce further easing in the upcoming meeting (October 5). Recent data released from Japan has been disappointing. Deflation persists while industrial production and trades remain negatively affected by yen’s appreciation. Despite the government’s intervention in September, the yen has been trading stubbornly at elevated levels against the dollar. In order to stimulate recovery, the central bank is likely to ease more aggressively. At the October meeting, the BOJ may announce to extend its fixed-interest loan operations to 12 months with size of the funding expanding. Further measures such as outright purchases of JGB are expected to come later in the year or in 1Q11. For BOE, speculations for expansion of the asset-buying program intensified upon release of the dovish BOE minutes and policymaker Adam Posen’s comments of further easing. We may see a 3-way split at Thursday’s MPC meeting after the Committee voted 8-1 last time to keep the policy stance unchanged. Unconventional measures are ways that central banks employ to lower interest rates when the policy rates have been reduced to virtually zero.

At the latest hedge book prepared by Societe Generale and GFMS, net producer hedging increased +0.16M oz to 7.19M oz in 2Q10. That’s the first and biggest increase since the fourth quarter of 2005. In September, we mentioned that de-hedging from gold companies has been a factor supporting gold price. While net hedging record in 2Q10 is not a positive signal, a quarter’s figure should not alter the big picture. The report said that further de-hedging activities will be seen later in the year, mainly from AngloGold Ashanti. For full year 2010, producers will de-hedge about 4.21M oz this year.