Crude resumed weakness after a brief recovery in Asian session. The front-month contract for WTI crude oil price plunged and approached 88 after OPEC signaled potential increase in supply. Saudi Arabia's Oil Minister Ali al-Naimi said the cartel may increase oil output to meet demand from mainly 3 regions, Asia particularly China and India, Middle East and Latin America. Al-Naimi also said that 'some OPEC countries will increase their production capacities, thus maintaining OPEC's spare capacity at approximately 6M bpd'. The cartel said in the January monthly report that it's 6M bpd of spare capacity could 'quickly be made available to the market'. As we mentioned last week in 'OPEC will Act to Prevent Excessive Rise in Oil Prices', the price rally will be different from the one we experienced in 1H08. Any rise above 100 would be unsustainable as the OPEC will raise supply to prevent oil prices to rise excessively.

Gold changed little in European session, hovering with a range of less than $10/oz. Although gold price started 2011 on a weak note, we remain bullish on the yellow metal. Similar to 2010, the key factor driving gold price higher is investment demand which will likely offset deteriorating fundamentals.

GFMS said in its Gold Survey Update 2 that it's feasible for gold price to break 1600 in late 2011 or early 2012. While fundamentals may weaken, investment demand should fill the demand/supply gap. On the supply side, GFMS estimated that mine productions soared +3% in 2010 to a record high of 2652 metric tons, marginally surpassing the previous high set in 2001. Mine output is expected to gain +6.4% in the first half of 2011 as new projects come on stream. Scrap supply jumped +22% y/y in 2H10 as gold price advanced but the rise in supply will ease in 1H11. On the demand side, jewelry demand will probably drop around -7% in 1H11, following a +16% increase in 2010, leading to the decline in fabrication demand. The impact of producers' de-hedging will also reduce significantly this year. The elimination of de-hedging and the drop in jewelry demand will need to be absorbed by rising investment demand.

Despite improvements in macroeconomic in the US and Europe, reasons for investments in gold remain intact. Interest rates will stay low in most advanced economies. According to GFMS, much of the demand will be 'driven by still low interest rates, poor returns elsewhere (and) the elevated level of government debts in Europe, the United States and Japan'. The Fed will leave the policy rate unchanged at exceptionally low levels throughout 2011. In the Eurozone, depending on how the sovereign debt crisis evolves, the ECB shall keep the main refinancing rate at 1% at least until 4Q11. Should the situation in peripheral economies deteriorate, the central bank may extend liquidity provisions. The lack of confidence in fiat currencies will drive investors to gold.

With the exception of the IMF, official sectors have shifted from a net seller to net buyer of gold in 2010. The phenomenon will continue to year. Meanwhile, robust demand from Asian economies also benefits the metal.