Expect demand to return should gold settle in a range for a few days

Gold is still pushing higher on good support this morning, as US treasury yields remain around the 2.75% level and implied real interest rates below 1%. The futures market also expects the Fed funds rate to remain low, well into 2011. The futures market puts the probability of an unchanged Fed Funds rate by Aug'11 at 66%. One month ago the futures market assigned a
probability of 54.6% to unchanged rates until Aug'11. Two months ago this probability was only seen as 25.4%.

Markets expectations of a rate increase are constantly pushed further into the future. This has happened consistently since the start of 2009 and we believe it will happen again. Low interest rates are bullish for gold. With the latest push in gold, physical demand has dried up. This pattern has repeated itself in the past, with demand falling away when the gold price rises fast. However, we expect demand to return should gold settle in a range for a few days.

Gold support is at $1,265 and $1,260. Resistance is at $1,285 and $1,300.