[AndrewWoo]

Since early June, gold has been in a tight range, and the view is that USD weakness will be the principal price driver in H2-2009, with a steady move higher the likely path as opposed to any shock-induced move in either direction. A repeat of a big upside surge spurred by investment inflows seems remote given that recent SEC filings of prominent hedge-fund holdings show little change since Q1, a period which was exceptional as gold rallied alongside the USD. The big downside risk to gold could come at the time when the FOMC removes the wording, “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period” from its statement. In turn, a likely trigger for this would be a strong reflationary environment that induces higher inflationary fears. However, this is not the base case. Analysts see a deflation risk in 2010-11, stemming from the massive output gap, a slowdown in broader money supply growth, and weak credit creation. So this is a risk for 2010, not 2009.