Commodity prices remains steady in European morning as OECD's upgrade in economic outlook lend some support.WTI crude oil for August delivery trades below 69 ahead of inventory data while gold price surges to 931, up 6 dollar from yesterday's close before pulling back.

OECD revised up its GDP forecasts on advanced economy to -4.1% in 2009, compared with -4.3% projected in March. Growth in 2010 will increase +0.7%, also higher than +0.1% in March. The organization anticipated the upside will mainly come from the US as recession will likely trough in 2H09. OECD expected US' economy will contract -2.8% (March's forecast: -4%) this year and grow by +0.9% (March's forecast: 0%) in 2010.

However, economic outlooks for Japan and the European were worse than before. Japan's economy will shrink -6.8% in 2009 before rebounding to +0.7% in 2010. These are compared with respective projections or -6.6% and -0.5% in March. For the Eurozone, GDP will likely contract -4.8% in 2009, more severe than -4.1% as estimated in March.

Concerning interest rates, the OECD believed both the Fed and BOJ will not raise interest rates before 2011 while the ECB should cut further.

China continues to be the growth driver and the organization forecast that the world's 3rd largest economy will growth +7.7% and +9.3% in 2009 and 2010 respectively.

In the near-term, gold price may remain in consolidation with downside risk. In response to the worst recession since World War II, governments worldwide have adopted various monetary and fiscal stimulus programs. Improvements in real economic data have started to revive investors' confidence. While market sentiment will fluctuate according to results of economic data and agencies' growth forecast, the worst phase of risk aversion has probably passed. Gold investment as a result of fear of a financial system breakdown has been reduced. As it's widely expected that any recovery will occur slowly and modestly, near-term risk of inflation is imminent, thus diminishing gold's appeal as inflation hedge. Moreover, gold price's movement will continue to be directed by the dollar, especially EUR/USD. Recent data signaled that the US may come out of recession sooner than the Eurozone, and therefore it's reasonable to expect limited downside for the dollar (or upside for EUR/USD).

That said, we are still in the midst of the worst crisis and governments worldwide will likely adopt a 'wait and see' manner - keeping interest rates at unprecedentedly low levels and maintaining the previously announced QE programs- until solid evidence of recovery is seen. We worry that countries that employed massive stimulus policies may not be able to 'exit' on a timely manner and eventually result in huge inflation and currency depreciations. That is why we believe gold's attractiveness will return and we remain bullish in the precious metal in the long-term.

While inventory and demand data always trigger ups and downs in crude oil and other energy prices, it do not affect gold prices as seriously. Although gold prices respond temporarily to rises and falls in jewelry demand, productions from mines as well as sales from central banks, the movements are short-lived.

Sources on gold supply are mainly from mine production, recovery from scrap and sales from central banks. Over the past few years, supply has remained stable at around 3500-4000 metric tons and we expect it will stay more or less the same at that level. On the demand side, jewelry demand, though still dominant, will continue to decrease while investment demand will rise.

Rather gold's price dynamics are driven more significantly by the macro-economy which is also the major determinant of other currencies' movement.

We have found that gold price has experience high correlation with EUR/USD. From 2000 to late 2004 (before launch of gold ETF in the US), the correlation between gold and EUR/USD was as high as 0.96 From late 2004 to September 2008 (before Lehman's collapse), the correlation was 0.86. Despite the decline, it remained at a high level and we believe the rest could be explained by inflationary concerns, especially from 2H07 to 1H08.

In late 2007, bankruptcy of Lehman was followed by bad news some many other banks and these fueled worries about security of global financial systems. Investors' flight to gold as safe-haven investment temporarily derailed its correlation with EUR/USD. However, the chart below showed that the relationship built up again in March 2009 and remain prominent so far.