The selloff in commodities accelerated in European session. While IMF's and BOJ's upgrade of growth forecasts signaled better economic outlook, Russia's bomb blast raised risk aversion. The front-month contract for WTI crude oil weakened below 87 while the benchmark contract for gold extended weakness towards 1320.

The IMF revised up its forecast for global economic growth in 2011 as driven by strong US expansion after extension of tax cuts. The world lender estimates the world economy will grow +4.4% this year, up from +4.2% projected in October. Growth forecast for 2012 is, however, left unchanged at +4.5%. Separately, the Bank of Japan announced to keep the policy rate unchanged at 0-0.1% and maintain the asset-buying program worth of 5 trillion yen. Meanwhile, the central bank forecast Japan's GDP will grow +3.3% in 2011, up from October's projection of +2.1%.

Concerning inflation, the IMF warned that inflation pressures are emerging in emerging economies. Indeed, with rises in commodity prices, advanced economies are also beginning to feel price pressures. While categorizing the overshoot of CPI in December as 'temporary in nature', the ECB president Trichet warned that central banks should act carefully in dealing with inflationary threats. In an interview with the Wall Street Journal, Trichet implied that the ECB would raise interest rates if it forecasts headline CPI would overshoot 2% for some time, although the source mainly comes from commodity prices. He also said 'all central banks, in periods like this where you have inflationary threats that are coming from commodities, have very careful that there are no second-round effects'. Meanwhile the President said that core CPI, an inflation gauge exceeding food and energy prices, is not 'necessarily a good predictor of future inflation'.

Trichet's concerns were echoed by French Prime Minister Nicolas Sarkozy who said that commodity price volatility is a key component in rising global inflation. He warned that commodity shortages have fueled speculation and called for new rules and high transparency to control commodity price gains. These comments highlighted inflationary worries are looming. We expect increasing inflationary pressures across the globe will eventually drive investors back to gold.

Gold holdings in SPDR Gold Trust, the world's largest gold ETF, increased +654K oz to 4.09M oz on January 21. This was the first daily increase recorded since January 11. Although holdings dipped modestly again on January 24, we believe the recent decline in gold price would attract investments. On the other hand, silver holdings in iShares have been dropping since January 5 amid liquidation on long positions built late last year. Gold/silver ratio has recovered after sliding below to a 4-year low of 46 in late December. At around 50, the current ratio remains too high as silver has weaker fundamentals than gold. We expect ongoing inflows into gold ETFs and outflows from silver ETFs will gradually send the ratio to 55/60.