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Strong dollar and profit taking are hurdles to gold rally, buy at $1640-$1670: Barclays

Friday, 24 February 2012 | 16:30
Gold has found itself caught between some physical demand support and positively softer investor interest. Gold is in search of its next catalyst, but near term hurdles persist in the form of dollar strength and profit-taking.
-The minutes from the January US FOMC meeting suggested a subtle shift in the possibility of further near term policy action. While further QE remains a possibility, given the current economic backdrop, some members may be content with the loosening affect of extending the horizon of the forward guidance on rates
-The recent appreciation of the EUR is likely to reverse. European growth is likely to be significantly weaker than that in the US and monetary conditions are likely to ease further in the euro area, partly due to the LTRO. The combination of increased risk appetite in FX markets but the USD outperforming other major currencies is usually a difficult environment for gold to perform well in.
-Gold held across the physically backed ETPs continues to grow albeit at a slower pace. Total metal held in trust across the major products has hit a fresh record high at 2413.8 tonnes surpassing the peak set in December. Inflows for the month to date have reached 17 tonnes.
-Non-commercial positions in Comex gold fell by 10.1k lots during the week ended February 14 driven by reductions in long positions (7.3k lots) and additions in short positions (2.8k lots).
-The latest Gold Demand Trends report from the World Gold Council for Q4 11 and the full-year 2011 reveals, in line with expectations, overall demand was down 2% y/y in Q4 11 but was flat y/y for 2011. Unsurprisingly, jewellery demand took a sizeable hit in Q4, falling 16% y/y, its weakest quarter since Q2 10, while bar and coin demand was up 1% y/y.
Technical Strategy
Gold is holding within a $1700/$1750 range while momentum studies unwind from stretched levels. We are bullish and would prefer to buy dips against the $1640/$1670 area. A move above $1752 would confirm that the next leg higher has begun toward our target near the $1800 range highs.
Support: $1700/$1670; Resistance: $1803/$1763 Medium term: Neutral
Source: Barclays Capital Commodities Research
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