Gold Pulls Back on US Stimulus Sentiment Posted by Brian Ford on August 15, 2012
August 15, 2012 – Gold prices pulled back in European markets Wednesday, extending an easing from the previous session, following a strong US retail sales report that has weakened expectations for another wave of monetary stimulus from the Federal Reserve.
However, the possibility that the European Central Bank could use this opportunity to initiate far-reaching measures to combat the Eurozone debt crisis continues to keep a level of support strong and to keep the price of gold above the $1,600 per troy ounce level.
The spot price of gold was down 0.1 percent to $1,596 per troy ounce in early trading on Wednesday. For the week, the precious metal is down 1.4 percent and is just above flat in trading for the year as the majority of sentiment reflects a tendency for investors to wait on the sidelines for a clearer indication of the policy direction of central banks, according to Reuters.
PradeepUnni, an analyst with Richcomm Global Services, has said that repeated instances of better-than-expected economic data in the US are beating back hopes for a more immediate policy of Quantitative Easing, which is currently affecting the gold market.
While he sees support at $1,585 to $1,590 per troy ounce, he does not see a sustained rally in the current environment with gains above the $1,630 level on the more difficult order to achieve without an announcement of stimulus in either the US or Europe.
The ability of stimulus to support the gold market makes the measures extremely attractive in the eyes of gold investors. If the government prints money to purchase its own bonds, there is a sudden burst of liquidity and sustained downward pressure on long-term interest rates, which is beneficial to the gold price. Additionally, the power of stimulus to create inflation benefits both gold and the gold price, which has an inherent value and therefore serves as a hedge against inflation.
Markets and analysts are watching for the release of US data including consumer inflation numbers, real earnings, and the New York Fed Empire State manufacturing index for more indication as to which direction central banks may take in coming weeks and months.
The slowing of the global economy has negatively affected shares in Europe and Asia on Wednesday, but expectations for the European Central Bank to take some action, particularly after comments from ECB president Mario Draghi, has propped up the euro in currency markets and dampened demand for German bonds.
The euro has been steady against the dollar when indications are that it should be weaker as investors are hesitant to initiate aggressive selling in the possibility of an ECB bond buying program to curb the currently high Spanish and Italian interest rates.
Despite a soft performance in the first half of the year, there is indication that investors have maintained an appetite for gold; per a US regulatory filing that indicates an uptick in gold holdings and the initiation of large gold positions by some major US funds.