Thursday, April 7, 2011

ECB Hikes Rate To 1.25%, As Exepcted; Gold Hardly Budges

The European Central Bank (ECB)'s Governing Council did the expected thing: its refinance rate is now 1.25%, up 25 basis points from 1%. Interestingly, the Euro was down a little on the news and the U.S. Dollar Index benefitted slightly. Deciding that the hike was already discounted, Euro holders sold on the news; the Portugese government's application for a bailout also added some pressure. The same seling on the news visited gold, which slid a bit after the decision was announced.

In slight odds with the ECB's decison, a European Commission report said the inflation uptick in the Eurozone was due to higher fuel and commodity prices; the core rate remains subdued, as they put it. Relying on the old trusty spare-capacity metric, they said there was too much unused capacity for the core rate to get out of hand. To the extent the ECB's Governing Council believes that report, further rate hikes are likely to be slow and limited - too little and too late, for skeptics of the metric.

Overshadowed by the ECB's decision was the Bank of Englad's decision to leave its own rate alone, at 0.5%, and to stay the course with its own quantitative-easing program. That decision was widely expected too. Gold got a little boost from the news, briefly ascending above $1,460. Evidently stung by the government of Portugal's decision to seek a bailout, the government of Spain insisted that they had no need for one. Spanish sovereign debt is still being sold for relatively low rates, endorsing the Spanish Finance Minister's insistence.

Gold again slid down last nght, but at a higher level than the previous night's slowdown. Instead of reaching $1,450, the metal reached $1,455 before getting stuck. Spending early morning around that level, with a few dips below that didn't lead to any more slippage, it climbed to $1,460 when the London market opened. Pulling back a few dollars, it got a boost when the Bank of England's announcement was made. Briefly ascending to above $1,460, it then took a brief dive to $1,458 as the ECB news prompted some selling. As of 8:15, the spot price had advanced a little to $1,459.80 for a miniscule gain of $0.70 on the day. The Kitco Gold Index attributed +$3.00 for predominant buying and -$2.30 for a strengthening greenback.

The U.S. Dollar Index, evidently having been discounted a little too much pre-ECB-hike, snuck up last night and early this morning. Starting the evening stuck below 75.55, the Index climbed unevenly but managed to get above 75.7 before its advance stalled around 3:45. Then rambling, it briefly sold off when the rate hike was announced but recovered quickly. As of 8:20, it was bumping against the 75.7 resistance level at 75.69.

A Bloomberg report said gold may advance on worries about European debt woes and rising inflation.
“Inflation uncertainty and geopolitical risks are still high,” said Bayram Dincer, an analyst at LGT Capital Management in Pfaeffikon, Switzerland. “Sovereign bankruptcy in the European periphery is also supporting gold prices.”
With regard to Libya, the number of Coalition warplanes was increased. The American and Italian governments, now more open about the goal of regime change, discussed ways in which Gadaffi could be gotten rid of. With regard to the ECB rate hike, another analyst is quoted as averring that the hike was largely priced in already. As the post-announcement slippage showed, that proved to be the case.

An earlier Reuters report said gold slid last night on the eve of the ECB decision, linking that slide to lowered ETF holdings.
"Moms and dads are moving out, out of gold and into the equities. But our expectations for gold moving higher has more to do with inflationary concerns, I think, particularly in China," said Jonathan Barratt, managing director of Commodity
Broking Services.

"Market is looking at not just oil, it's looking at food and I think that's important, particularly when corn reached a record high. Expectations are that foodstuff will continue to rise."...

"There's some profit taking at the high end. I think people are shifting money into stocks because the U.S. economy seems to be improving. I don't think the ETF is giving you better returns," said a bullion dealer in Hong Kong.

"Also I think the gold market is moving too slowly after reaching the high."
Scrap sales increased in Singapore, called forth by the new record. Holdings of the SPDR Gold Shares Trust dropped yesterday, despite the new record, as holders cashed in too. Now at their lowest since last May, holdings dropped 7.28 tonnes to 1,205.47 tonnes.

A Wall Street Journal report said gold stalled because of a stronger greenback and the then-impending ECB rate hike.
"The market is certainly back in bullish mode amid expectations of a persistently soft U.S. dollar and the stronger single currency," said VTB analyst Andrey Kryuchenkov. A weak greenback, combined with "recovering investor interest could still push gold higher with intermediate resistance around $1,465/oz-$1,470/oz," he said.

Recent dovish comments by the U.S. Federal Reserve are also proving supportive for gold prices, although a turnaround in the Fed's stance on monetary tightening could undermine the metal's upside progress, Mr. Kryuchenkov added.
The article also said the euro was weakened by Portugal's decision to seek a bailout, which it may have been once the ECB rate hike had been factored in.

Moving to the U.S. economy, intial jobless claims for last week fell by 10,000 to 382,000. The drop was larger than expectations, so the news was better than expected. More focused on ECB President Jean-Claude Trichet's comments about the Governing Council watching developments closely, and the ECB still being accomodative on balance, gold fluctuated just below $1,460. It took a dollar dive when the jobless-claims number was released. As of 8:42, the spot price was $1,458.60 for a smidgen's drop of $0.50 on the day. The Kitco Gold Index assigned +$0.50's worth of change to predominant buying and -$1.00's worth to greenback strengthening. The U.S. Dollar Index, after flailing about with more volatility than before, ended up downwards from where it was before regular trading started; as of 8:45, it was still flailing at 75.63.

As things turned out, the ECB rate hike was anticlimactic. It had been widely anticipated, and gold changed little one it was announced other than taking a brief drop on selling the news. Of more significance was the Bank of England's decision to say pat. With the big event out of the way, gold might fluctuate in regular trading; a letdown effect could engender a loss on the day.

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