Gold price slides to 1103 in European session as investors take profit after the 3-day rebound. The outlook for gold price depends heavily on US inflation and interest rates. Fed funds futures yesterday showed a 60% probability (around 36% in November) that the Fed will hike hikes by at least 0.25% by 2H10. While the market has rigorously speculated the Fed will raise the policy rate earlier than previously expected, the Fed and analysts in the street remain cautious and forecast the Fed funds rate will stay unchanged at 0-0.2% for most of the time in 2010.

Concerning inflation, the Fed reiterated it will remain subdued for sometime as substantial resource slack likely to continue to dampen cost pressures. However, breakeven rate of 10-year TIPs suggested the opposite. The breakeven rate surged to 2.32% last Friday, a level before the collapse of Lehman Brothers. Obviously, the market has turned more optimistic about the US outlook and began to talk about inflation again. Diverse opinions about interest rate and inflation outlooks between investors and policymakers have made the movement of USD, and hence gold, difficult to forecast.

In our view, we believe the Fed will keep the policy rate low at least until the second half of next year to avoid any premature tightening which will be disastrous to the economy. Moreover, although unemployment rate surprisingly dropped -0.2% to 10% in November, we are yet to confirm the rate has peaked. Given the Fed's practice to raise interest rate at least half a year after the jobless rate has peaked, it's unlikely to see rate hike in 1H10. Should the Fed continue to disappoint investors by keeping rates unchanged at 0-0.25%, renewed selling pressure in USD would boost gold price higher.

On the other hand, crude stays firm at around 79 amid speculations that economic recovery will help demand growth and eliminate inventory. In 2009, crude oil price rallied +70% as most of the gains were attributed to rapid growth in demand in emerging countries. In developed markets, demand has picked up from 4Q08 but the pace of recovery has been slow. While US and European energy demands will grow in the coming 2 years, they are not anticipated to return to previous levels. Goldman Sachs expects total petroleum demand in the US will edge high to 19M bpd by 3Q10 (18.6M bpd in 3Q09) while demand in Europe will grow by +0.15M bpd in 2010.

Stocks markets are generally higher after Christmas holiday although trading remains thin. In Asia, the MSCI Asia Pacific Index climbed +0.4% with Australia's S&P/ASX 200 Index rose +1.1% as driven by commodity stocks. Other regional indices also gained modestly.

In Europe, UK's FTSE 100 Index soars +0.5% to 5428, making it the first index in advanced economy to recoup all the losses made after Lehman's collapse. Other indices also edge higher with Germany's DAX adding +0.1% and France's CAC 40 Index gaining +0.3%.

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