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Gold Could See Short-Lived Boost Thursday Following ECB Decision

By Neils Christensen of Kitco News
Wednesday October 1, 2014 8:43 AM

(Kitco News) - Gold prices may see a boost Thursday, on the back of a bounce in the euro and a weaker U.S. dollar, after the European Central Bank releases the details of its quantitative easing program, but it won’t be enough to shift the yellow metal's downward momentum, analysts said.

Although the health of the European economy is in question with the looming threat of deflation, some market analysts said they expect the ECB and its President Mario Draghi to be relatively conservative when announcing the details of its quantitative easing program.

At its September meeting, the central bank cut interest rates by 10 basis points across the board, dropping – in particular – its deposit rate to negative 0.20%. Following the monetary policy meeting, Draghi said the central bank would purchase “simple and transparent” asset-backed securities. The purchases will consist of a broad range of euro-denominated covered bonds and non-financial assets. He added that more details about the program would be released at its October meeting. The announcement of a quantitative easing program weighed on the euro since it means more liquidity in the market.

Simon Ward, chief economist at Henderson Global Investors, said since the announcement, markets have priced in significant weakness in the ECB’s monetary policy, and a cautious policy stance from Draghi could create a short-term bounce in the euro against the U.S. dollar, which in turn would help gold prices.

Expectations for aggressive action from the ECB picked up considerably Tuesday after Eurostats, the European Union’s statistics agency, said that inflation rose 0.3% in September, down from a 0.4% rise seen in August and July.

However, Ward said the markets could be overestimating the risks of deflation as September’s drop was due to a significant decline in energy and food prices, which could be considered positively for European consumers.

Ward also noted there is still resistance from some members in the ECB, mostly from Germany, to introduce asset-backed purchases, which is why it is unlikely Draghi will announce major purchases following Thursday’s meeting.

He added he is not expecting the central bank to announce a quantitative easing program on the same scale as the Federal Reserve or the Bank of Japan. The Fed is close to wrapping up its quantitative easing program, which is one reason for the U.S. dollar strength, particularly against the euro.

“The bank has announced a lot of initiatives in the last three months,” he said. “I think now they just want to dip their toes into the water.”

Looking at the currency market, Ward said the U.S. dollar “looks a little overbought” and a small-than-expected quantitative easing strategy would be euro-positive.

Although a bounce in the euro would be positive for gold in the short-term, Ward added that he does not see a lot of long-term potential for the yellow metal.

Until there is a down turn in the U.S. economy, gold will remain undpress pressure, he said.

Simon Derrick, chief currency strategist at the Bank of New York, agreed that the ECB is not ready to commit to a significant quantitative easing program compared to other central banks, and as a result the euro could see a bit of strength. However, any buying momentum would be short-lived.

“That negative deposit rate is a significant weight on the euro, which shouldn’t be underestimated in the long term,” he said.

Regarding gold prices, Derrick said even if gold gets a bounce on Thursday, it will only be for a short-time. He added that the yellow metal it doesn’t look like an attractive investment at the moment, as U.S. dollar strength still dominates the marketplace.

Ole Hansen, head of commodity strategy at Saxo Bank, is also expecting to see a bounce in gold as it looks oversold against the U.S. dollar, and agreed that any rally would be short-lived.

“The U.S. dollar is extremely overbought so the likelihood of a bounce in gold is there,” he said. “But there are a lot of would-be U.S. dollar buyers waiting in the wings to jump into this rally that they have already missed.”

By Neils Christensen of Kitco News; nchristensen@kitco.com



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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