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Updated: ECB Unlikely To Buy Gold Despite Recent Comments - Analysts

By Kitco News
Tuesday November 18, 2014 11:47 AM

Editor's Note: The article was updated to include comments from Capital Economics.

(Kitco News) - The gold market is finding some support after news reports revealed that the European Central Bank could buy gold as part of its asset-backed securities purchase program, but some analysts think that step is an unlikely scenario.

Monday, Yves Mersch, a member of the ECB executive board, said that the central bank has a broad range of options in its current quantitative easing plan and could theoretically buy gold, exchange-traded funds and stocks before it started buying sovereign debt from EU member countries.

Image courtesy of the European Central Bank: ECB Executive Board Member Yves Mersch said on Monday that "theoretically" the ECB could buy gold as part of its asset-backed secuities purchase program

According to some analysts, the remark was made to downplay ECB President Mario Draghi’s comment from earlier in the day that the central bank might consider buying government bonds.

Although the headline is believed to have helped push December gold futures above $1,200 an ounce, hitting a three-week high, some analyst don’t see it as anything more than a headline.

Ole Hansen, head of commodity strategy at Saxo Bank , said that he hasn’t put much stock in the Mersch’s remark and said it is “unrealistic” the ECB would try to sell euros and buy gold as a way to weaken the currency and boost inflation.

Bernard Dahdah, precious metals specialist at Natixis, wouldn’t outright dismiss the idea of the ECB increasing its gold reserves but agreed that it is an unlikely scenario.

He added that Drahgi has regularly said that the ECB is committed to using “all unconventional methods” to fight deflation and promote economic growth; however, it would take a lot of gold to achieve that goal.

“Buying gold is more of a long-term plan and it looks like the ECB needs to find more short-term solutions,” he said. “However, buying gold could be seen as a neutral way to weaken its currency.”

Julian Jessop, head of commodity research at Capital Economics, also didn’t completely dismiss the idea of ECB gold purchase but gave some reasons why it is an unlikely scenario.

“Buying gold might also be more acceptable to those worried about inflation or fiscal discipline than buying government bonds. But there are a number of reasons why it is very unlikely,” he said.

One reason is the fact that gold purchases won’t increase lending within the eurozone, which is something the ECB is trying to achieve with its current purchase program.

A second reason is that there isn’t enough investible gold worldwide to hit the ECB’s balance sheet target of about €1 trillion. He added that the entire investible gold market is currently worth about €1.8 trillion.

“Unless the ECB was willing to buy up a large share of the market and significantly increase its current holdings - worth €15bn or so - it would still be well short of the sums required to achieve the desired expansion of its balance sheet,” he said.

George Gero, vice president and precious-metals strategist with RBC Capital Markets Global Futures, agreed that it is unlikely the ECB will actually buy gold. He added that the gold purchases would benefit the Russian economy as they are one of the top gold-producing nations in the world.

“I doubt the European Central Bank would buy gold at a time when its member countries are looking at implementing more sanctions against Russia,” he said.

Gero said that Tuesday’s early morning rally in gold actually had less to do with the ECB headline and was more technical positioning and short-covering.

“I think there have been too many bears in the woods and now you are seeing a little bit more buying,” he said.

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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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