The precious metal complex got hammered last week. The main reason is probably the Fed's more hawkish policy statement delivered after the March FOMC meeting. Policymakers acknowledged improvement in economic conditions as unemployment rate has declined notably in recent months. Gold declined -3.24% and settled at 1655.5 last week while silver plunged -4.69% to end the week at 32.57. Crude oil prices remained range-bounded most time of the week, only showed more volatility later in the week after an unverified report saying that the UK and the US would released strategic petroleum reserve. The news was later denied by both the UK and the US. Yet, speculations could remain intense as the US Energy Secretary Steven Chu and Treasury Secretary Timothy Geithner have stated recently that a release is under consideration of the government in order to bring down high oil prices Crude oil prices slipped with the front-month WTI and Brent crude contracts losing -0.32% and -0.13% respectively.

Concerns over oil supply disruption have been a main feature in the oil market since last year. The civil war in Libya triggered the IEA's June announcement of the coordinated release of 2M bpd over 30 days onto the world market. Yet, the IEA executive director said earlier this week that there's no need for the release of SPR for now.

If we take a closer look at the demand/supply balance, we would discover that the supply side problem is probably more serious than last year. Although production in Libya has been recovering, other oil producing countries (e.g. Iran, Syria, Sudan and Yemen) are under threat of output disruption. Meanwhile, the market is also facing the threat of a disruption to the Strait of Hormuz, despite a low probability.

While Saudi Arabia has pledged to take the lost Iranian oil, the latest IEA data indicated that Saudi's spare capacity levels have fallen below 2M bpd as of February for the first time since 4Q08. This suggests that there's less buffer for Saudi to act as a substitute.

Should there be a SPR release, price actions of crude oil and gasoline are expected to fall as learnt from the experience last year. Following the SPR release in June last year, retail gasoline and WTI crude oil prices dropped -9% and -12% respectively in the subsequent 3 months.

The DOE/EIA reported that gas inventory dropped -64 bcf to 2 369 bcf in the week ended March 9. Stocks were +735 bcf above the same period last year and +807 bcf, or +51.7%, above the 5-year average of 1 562 bcf. Separately, Baker Hughes reported that the number of gas rigs fell -7 units to 663 in the week ended March 15. Oil rigs soared +21 units to 1 317 and miscellaneous rigs dipped -3 unit to 4, sending the total number of rigs to 1 984 units. Directionally oriented combined oil, gas, and miscellaneous rigs climbed +16 units to 228 while horizontal rigs increased +16 units to 1 180 and vertical rigs fell -21 units to 576 during the week.

Gold dropped last week as mainly driven by the dissipated speculations of QE3. Indeed, since the middle of last year, gold have been moving within a broad range between 1600 -1850. During the period, gold 's rally has been driven by anticipation of further central bank monetary easing, especially QE3 by the Fed, while the decline has been due to fading of such hopes.

The yellow metal has declined almost -15% from the peak of 1923.7 made in September. Whether gold's long-term uptrend has ended is a controversial topic but strength of official demand continues. Central bank purchases, mainly from emerging economies, were robust last week. According to Financial Times, the Bank for International Settlements bought significant quantities of gold on the international market amid falling price on behalf of central banks. The new reports stated that the BIS bought 4-6 tonnes of gold, worth roughly $250m-$300m at current prices, in the over-the-counter physical market last week.

Although the market appeared to be pricing out the chance of further QE3, we remained hopeful that the Fed would maintain its monetary policy as accommodative as possible with the next move in the second half of the year. in the meantime, we continue to believe that zero interest rates in the US and negative real rates remain supportive for the precious metal.