Gold Weakens Further as USD Rebounds ahead of G-20 Pledge

ONG Focus | Insights | Written by Oil N' Gold | Fri Oct 22 10 07:25 ET

Gold extended weakness to 1315.6 in European session as the dollar rebounded as G-20 finance ministers meet in South Korea. While the communiqué, which likely focuses on the currency market, should not alter the long-term downtrend of the dollar, it may decelerate the decline in the near-term. After all, the dollar index has slumped more than -12% since June. Investors would probably use any possible reason to take profits from their short-USD positions. Crude oil rebounded above 81 but the near-term outlook remained soft. The market held mixed views on China's oil processing data for September.

The recent rally in commodity prices has mainly driven by weakness in USD. Specifically for gold, while the yellow metal has made new record highs in USD-terms since September, price remains range-bounded in EUR-terms. Therefore, the outlook for USD is crucial for commodities' movements.

USD rebounded as finance ministers from the world's 20 largest economies meet to discuss above currency tensions between industrial and emerging countries. While we do not expect the conflict originated from global economic imbalance will be resolved, the statement released by the ministers may ease the tensions temporarily.

Spoke at an economic forum, Kansas Fed President Thomas Hoenig reiterated his stance against further easing. He said that ‘Monetary policy is about an environment that's supposed to be stable…When you try to use it in a way that floods the market with liquidity, you can in fact get very bad outcomes'. The next event risk for the dollar is the November FOMC meeting. The market has priced in announcement of additional easing measures after the meeting.

Currently trading at 81.2, the front-month contract for WTI crude oil has been fluctuating above 80 over the past few days. China implied oil demand rose +6.2% y/y to around 8.68M bpd. While this is the second largest reading after the record high of 8.9M bpd in June, some analysts pointed out the single-digit growth rate signals a slowdown from the first half of the year. The +6.2% growth rate in September indeed results in a +5% growth in 3Q10, compared with +11% in 2Q11 and +18% in 1Q10. In our opinion, the moderated growth was due to high base effect and situation may continue in the fourth quarter. With China's GDP growth slowing in the second quarter, oil demand may also ease. However, the long-term outlook should remain healthy as China's economy is on track for soft-landing.

 

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