WHOLESALE gold bullion prices dipped back below $1670 an ounce Friday morning in London, 0.9% up on where it started the week, after jumping 1% yesterday following the European Central Bank‘s decision to leave interest rates on hold, which was also followed by gains for the Euro.
Silver meantime drifted back below $30.70 an ounce this morning, while stock markets were little changed and commodities edged lower along with US Treasury bond prices.
Gold bullion could form part of “an immensely important phase in the history of world money,” according to a report published today by the World Gold Council and produced by the Official Monetary and Financial Institutions Forum.
“Western economies have attempted to dismantle gold‘s monetary role,” the report says,”[but] this has failed.”
In the US, the Federal Reserve‘s policy of holding interest rates at near-zero for a prolonged period “may substantially increase the risks of future financial imbalances,” said Federal Reserve Bank of Kansas president Esther George yesterday, adding that it could also “hamper attainment” of the Fed’s 2% inflation target.
The Fed has targeted a Federal Funds Rate of 0.25% or lower since December 2008, and last month said its policymakers expect this rate will remain appropriate until unemployment falls to 6.5%.
In recent months the Fed has also committed to buying $85 billion of US Treasuries and agency mortgage back securities each month “to support a stronger economic recovery”, although these purchases have not as yet been linked to any target variable.
“Attempts to also put thresholds on the timing of asset purchases may be a bridge too far,” St Louis Fed president James Bullard said Thursday.
Bullard and George are both voting members of the Federal Open Market Committee this year.
“Both these [policymakers'] comments suggest that the Fed may be getting close to preparing the markets for at least a partial withdrawal from its aggressive asset purchasing program, a likely negative for gold,” says Ed Meir, metals analyst at brokerage INTL FCStone.
“However, we have yet to hear from the main man himself, Chairman Ben Bernanke, who will soon have to clarify where the Fed stands going forward and how much more money it is willing to throw into the system.”
“With little sign that core FOMC members such as Bernanke and Yellen are shifting,” adds a note from Standard Bank, “the Fed’s QE is likely to continue for as far as the eye can see.”
In Europe meantime, the Eurozone economy “should gradually recover” from recession later in 2013, European Central Bank president Mario Draghi told a press conference Thursday.
“Our accommodative monetary policy stance, together with significantly improved financial market confidence and reduced fragmentation, should work its way through to the economy, and global demand should strengthen,” said Draghi, though he acknowledged that it is “too early to claim success”.
“It is hard to see that the ECB could invent anything similar to an OMT for the real economy,” argues ING economist Carsten Brzeski, referring to the ECB‘s Outright Monetary Transactions program announced last September, through which it would buy the bonds of governments that agree to the conditions of a bailout program, with a view to lowering their market borrowing costs.
“The ECB will secretly keep its fingers crossed, hoping that better financial-market conditions and structural reforms eventually really lead to an economic recovery.”
The ECB left its main policy rate on hold at 0.75% yesterday, confounding those who had predicted a rate cut.
“[We expect] the ECB is likely leave rates on hold for the remainder of the year,” says HSBC analyst James Steel.
“If the threat of further monetary easing is reduced and the Euro continues to strengthen as a result, then gold prices are likely to benefit, we believe.”
The Euro jumped two cents against the Dollar to over $1.32 following the decision, while gold in Dollars rallied 1%.
Gold in Euros by contrast fell, hitting €40,422 per kilo (€1257 per ounce) this morning, down 0.8% on the week.
Over in China, consumer price inflation rose to 2.5% in December, higher than analysts were expecting and up from 2.0% a month earlier, official data published Friday show.
Japan‘s new prime minister Shinzo Abe announced a ¥10.3 trillion ($116 billion) stimulus package earlier today.
The package “will create wealth through economic growth,” said Abe.
Japan‘s economy is currently in its fifth recession in fifteen years, while its debt-to-GDP ratio is around 220%, the Financial Times reports.
In India meantime, gold buying has “fizzled” since earlier in the week, when premiums over London prices hit two-month highs amid expectations of a hike in gold import duties.
“People are not interested in stocking up at these levels as prices have been in the same range for three or four days,” one dealer at a private bullion importing bank told newswire Reuters this morning.
India‘s trade deficit meantime narrowed to $21.4 billion last month, down from $19.3 billion a month earlier, despite a 1.9% year-on-year drop in exports, a trade ministry official said Friday.
India‘s central bank last week proposed measures to curb gold bullion imports due to their role in exacerbating India‘s current account deficit.
By Ben Traynor