السبت، 21 يوليو، 2012

ECB Ponders "Uncharted Territory", Monetary Policy "Will Push Up Gold Prices" - 4 July 2012

Gold Prices held steady around $1615 per ounce Wednesday morning in London – 1.1% up on the week so far – while European stock markets edged lower and the Dollar gained, amid speculation that the European Central Bank will cut interest rates tomorrow.

A day earlier, Gold Prices rallied as high as $1624 per ounce during Tuesday's US trading, the last trading day before today's Independence Day holiday.

"Short covering and bargain hunting helped support the rally," says a note from Commerzbank, referring to the practice of traders who have bet on gold going lower closing their position by Buying Gold futures or options.

Spot Silver Prices meantime climbed as high as $28.41 per ounce this morning – 3.2% up on last week's close – as other industrial commodities edged lower.

On the currency markets, the Euro fell below $1.26.

"The main focus of the week is Thursday's ECB meeting, where a rate by of 25 basis points [one quarter of a percentage point] by the ECB is expected," says a note from Swiss bullion refiner MKS.

The ECB's main policy rate currently stands at a record low of 1% – though it remains higher than those of the Bank of England and the Federal Reserve.

"The economic case for a 50 basis-point rate cut is pretty watertight," says Ken Wattret, chief Euro-area economist at BNP Paribas.

"But for now it's easier to just cut by 25 basis points...that is enough to show you are standing ready to do something," he adds, noting that a cut in rates would benefit banks that borrowed over €1 trillion at the ECB's three-year longer term refinancing operations (LTROs) in February and December.

Cutting interest rates would be "a bold move and will lead the ECB into uncharted territory" says Julian Callow, chief European economist at Barclays Capital in London.

"With soaring unemployment and few signs of the economy recovering, some strong monetary medicine is needed. But let's be honest, a rate cut by itself will not end the recession, we need much more for that."

The services sector of the Eurozone economy continued to contract last month, although at a slowly rate than in May, according to purchasing managers index data published Wednesday. The June Eurozone Services PMI was 47.1 – up from 46.7 in May (a figure below 50 indicates sector contraction).

Germany's Services PMI meantime fell by more than expected, from 51.8 in May to 49.9 last month.

Here in London, the Bank of England is also due to announce its latest policy decision on Thursday, when it is widely expected to announce at least a further £50 billion in quantitative easing asset purchases.

"As everybody now expects QE the announcement effect has already happened so there will be very little negative impact [on Sterling], if any at all," reckons Adam Cole global head of FX strategy at investment bank RBC Capital Markets.

Last month's UK Services PMI showed a bigger sector slowdown than most analysts were expecting, coming in at 51.3 – down from 53.3 in May.

The front pages of British newspapers are dominated today by the appearance before the Treasury Committee of former Barclays chief executive Bob Diamond (available to watch live at 2pm UK time), after written evidence from Barclays included reference to a conversation between Diamond and the Bank of England's Paul Tucker.

Tucker, the Bank's deputy governor for financial stability and a possible replacement for Mervyn King as governor, was one of two Bank staff members cited by the Telegraph this week as having benefited from pension pot gains in excess of £1 million over the last year, "due mainly to a fall in gilt yields".

The US economy meantime will grow at 2% this year, according to revised International Monetary Fund forecasts. The IMF also cut its 2013 growth forecast yesterday, from 2.4% to 2.25%, citing the risks posed by the so-called "fiscal cliff" – the combination of spending cuts and tax rises due to come in next January unless lawmakers agree alternative policies.

"It is critical to remove the uncertainty created by the 'fiscal cliff'," the IMF's report says, "as well as promptly raise the debt ceiling, pursuing a pace of deficit reduction that does not sap the economic recovery."

"No country can go on with heavy and growing debt," added IMF managing director Christine Lagarde.

"In order to bring the debt under control, action needs to be taken over a period of time...it needs to be gradual, not so contractionary that the economy stalls."

"Americas debt/GDP [ratio] at close to 100% is not near-term threatening," says Bill Gross, founder of world's largest bond fund Pimco, in his monthly Investment Outlook.

"But if continued upward on trend could be absolutely debilitating....an authentic debt crisis – which the world is now experiencing – can only be ultimately cured in two ways: 1) default on it, or 2) print more money in order to inflate it away. Both 1 and 2 are poison for bond and stock holders."

Back in Europe, Deutsche Bank has cuts its gold forecast for 2012 to an average Gold Price of $1726 per ounce – down from the previous forecast of $1800 – with analysts citing the "holding pattern" they say has been adopted by central banks. Next year, however, Deutsche Bank forecasts gold will average $2050 per ounce – more than 25% higher than its current level.

"While we question the effectiveness of [monetary policy] in sustainably supporting growth in the western world," a note from Deutsche says, "we do believe that it will have the effect of pushing up Gold Prices as the metal responds to the implied erosion in value of money in Dollar terms."

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