Gold Advances as Stocks Hit 5-Year Highs- Still at Risk Sub $1693

Fundamental Forecast for Gold: Neutral

- Commodity Technical Analysis: Gold Extends Gains, Tests Early January High

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- Commodities: Gold, Oil Vulnerable as All Eyes Turn to Bernanke

Gold continued its advance from last week with the previous metal advancing 1.53% to trade at $1688 at the close of trade in New York on Friday. The advance has taken bullion into key resistance at $1693 as global equity markets pushed to multi-year highs and commodities rallied on the back of strong economic data out of the US and China. Housing market data this week offered further evidence that the pace of the recovery is gathering with December housing starts surging 12.1% m/m, up from a previous decline of 3% in November as initial jobless claims fell to their lowest levels since early 2008. On Thursday, GDP data out of the world’s second largest economy came in stronger than expected with a print of 7.9 %, easing concerns regarding a potential ‘hard landing’ in China. The headlines have continued to support risk with gold prices tracking broader risk sentiment throughout the week.

Inflation data this week showed the pace of price growth in the US holding steady with the year on year print coming in below expectations at 1.7% (vs. Expected 1.8%) from a previous read of 1.8%. Although the data continues support the Fed’s official statement that inflation expectations remain “broadly balanced”, various Fed officials have continued to vocalize their concern that current central bank policy may stoke inflationary pressures down the road. Still, in the near-term Bernanke has remained steadfast in his convictions with the chairman noting that inflation expectations remain ‘well anchored’ and that the US was ‘on track’ to stay at or below the 2% target. As such, we remain cautious on gold here in light of the recent rally off the monthly lows while noting that a break of near-term technical resistance may be in the cards should the rally in risk assets persist.

Looking ahead to next week, gold traders will be anticipating the latest release of the IMF World Economic Outlook for an updated forecast on growth prospects around the globe. Look for gold to react accordingly with an upbeat assessment offering support for the broader commodity rally as economic activity continues to improve. A downbeat outlook could trigger a correction in risk assets with such a scenario likely to fuel a rejection of key support just above current levels.