Firmness in Gold Despite USD's Strength Signals Lure for Safe-Haven

By IBTimes Staff Reporter | March 15 2010 10:31 AM

Energy prices remain soft in European morning as investors await economic data from the US. Concerns over tightening in China and India, as well as OPEC's decision on production quotas are also causes for the lukewarm trading. The front-month WTI crude oil futures slide to 80.5, down -0.9%, in European session. Prices for oil products also weaken with heating oil trading at 2.086 and gasoline at 2.247.A series of data, ranging from the manufacturing sector to the property market, will be released in the US today. Industrial production is expected to be flat in February after soaring +0.9% a month ago. Empire State manufacturing index might have fallen to 20 in March, following a surge to 24.91 in February. NAHB housing market index probably stayed at 17 in March.

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Comments from oil ministers suggest the OPEC will leave the output quotas unchanged at the March meeting (March 17). However, what Iran's OPEC governor, Mohammad Ali Khatibi, said has diminished market sentiment.

Khatibi anticipates oil market will be oversupplied later this year if OPEC members fail to comply with their quotas. The cartel decided to cut production by -4.2M to 24.845M bpd in late-2008 in order to rescue the tumble in oil price. However, the 11 members bearing quotas produced a total of 26.811M bpd in February, thereby taking the compliance down to 53% from 78.6% in March 2009.

The dollar strengthens against major currencies amid concerns over slowdown in growth. Apart from China, inflation in India also surged to a 16-month high in February. The benchmark wholesale price index jumped +9.89% from the same period last year, beating market expectations and triggering speculations over a rate hike in coming weeks by the Reserve Bank of India.

According to IMF's forecasts made in January, India's GDP will grow +7.7% in 2010, followed by +7.8% in 2010. China and India are expected to be leaders in driving global economic expansions in 2010 and 2011. USD surges against EUR and GBP on deficit worries. The meeting about helping Greece by Eurozone officials in Brussels will likely be rosy in words, ambiguous in practice. Before Greece's deficit issue is out of woods, the market began to worry about UK. Prime Minister Gordon Brown's administration forecasts deficit will reach 12.6% of GDP, compared with Greece's 12.7%.

Gold stabilizes after Friday's decline and recovers to 1107 in European morning. Sovereign crisis in Europe and potential moderation in emerging market growth increase precious metals' attractiveness. In fact, we believe gold is a better safe-haven asset than the dollar as the US is also facing challenge in dealing with budget deficits. According to Moody's both the US and the UK are moving closer to losing their AAA credit ratings as their debt affordability is the most stretched.