Sentiment remained weak in European session as concerns over US recessions and European banking crisis continued to dominate the market. Gold extended the uptrend and rallied to another all time high of 1872.2 amid the uncertain outlook. Oil prices slumped with the front-month contract for WTI crude oil breaching below 80 again for the third time in less than 2 weeks. Brent crude also dropped but the size was smaller as disruptions in the North Sea and Africa provided supports. The WTI-Brent crude spread widened to a record level of 25.88.
The Venezuelan government said that it's about to transfer its $11.1B in gold reserves from banks in western countries to emerging markets such as China, Russia and Brazil. As of August 8, the country holds 18.3B of gold reserve with 11.1B of which staying in US and European banking while the remaining $7.2B being held by the central bank. Apart from that Nelson Merentes, President of the central bank, said there are plans to transfer financial assets to BRIC countries. The government will also diversify other reserves away from US assets. Meanwhile, the government will also nationalize Venezuela's gold industry so as to boost reserves. According to President Hugo Chavez, the moves aim to eliminate the 'dictatorship' of the US dollar. Notwithstanding the increase in risks in Venezuela's economy, the measures signal the country's increasing lure for gold.
Despite gold's relentless rally over the past 2 months, gold equities have not shared the same attractiveness. While poor production growth, weak earnings outlook and technical risks are factors dampening stock performances, investors probably prefer to have direct exposure to gold price instead of indirect once. Therefore, ETFs and futures have received much more robust demands than equities. We believe the trend will continue in the near-term, especially when the stock market has got hammered by the loss of risk appetite.
On the macro front, German's PPI surprisingly jumped to +0.7% m/m in July from +0.1% in June. From a year ago, inflation soared to +5.8%, compared with consensus of +5.3% and June's +5.6%. In spite of rising price pressures, the ECB will likely leave interest rates on hold, if not to cut, for some time given the current economic downturn. Canada's CPI probably eased to +2.8% y/y in July from +3.1% a month ago but core inflation might have risen to +1.6% from +1.3% in June.