Gold Focus Reports Bernanke to Stay

 Accommodative on Monetary Policies

Wall Street retreated and the US dollar weakened after Fed's Chairman Ben Bernanke's testimony. The Chairman's comments were largely the same as those made in the National Press Club last week, suggesting interest rates will stay low and QE will remain in place for some time. Crude climbed higher initially amid ongoing global growth expectations and continuing Egyptian unrest. Gains were, however, erased after the DOE/EIA reported increases in crude, gasoline and distillate stocks. The front-month contract for WTI crude oil price ended the day at 86.71, down -0.26%. Gold traded choppily and only edged modestly higher despite USD's weakness. The benchmark Comex contract added +0.10% to 1365.5 at close.

Fed Chairman Ben Bernanke told the Housing Committee yesterday that 'notable declines in the unemployment rate in December and January, together with improvement in indicators of job openings and firms' hiring plans, do provide some grounds for optimism on the employment front. Even so, with output growth likely to be moderate for a while and with employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level'. Concerning inflation, he noted that 'we have recently seen increases in some highly visible prices, notably for gasoline. Indeed, prices of many industrial and agricultural commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies, coupled, in some cases, with constraints on supply. Nonetheless, overall inflation is still quite low and longer-term inflation expectations have remained stable'.

These comments signaled the Fed will continue leave the policy rate at exceptionally low levels for an extended period of time. Moreover, the 600B asset-buying program announced in November, 2010 will be carried on until expiry in June 2011. The market had speculated the Fed may unwind QE2 earlier than scheduled over the past few weeks as US macroeconomic data showed signs of improvement.

The oil inventory reported yesterday was disappointing. While the increase in crude oil inventory was low than expectations, gasoline stock-build almost doubled consensus while distillate inventory surprisingly soared. Interestingly, only crude oil price was affected by the report. Gasoline and distillate prices rose, gaining +1.28% and 1.37% respectively. The main reason for the gains was the surge in Brent crude prices. Plants on the East Coast, where NYMEX gasoline futures are delivered, refine oil from Europe and West Africa and the oil is priced against Brent. Rises in fuel prices not driven by fundamentals are dangerous and should be expected for a sharp correction once the temporary factor, i.e. surge in Brent crude prices on Egyptian crisis, is gone.

On the dataflow, Australia's unemployment rate stayed at 5% in January but the number of payrolls increased +24K during the month, compared with a downwardly revised +1.8K in December. In the US, initial jobless claims probably fell -5K to 410K in the week ended February 10. The BOE will meet today but policymakers will very likely leave the Bank rate unchanged at 0.5% and the asset-buying program at 200B pound. We expect the 6-2-1 split on vote to continue.