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European Central Bank Bond Plan Pushes Gold To Six Month High

by Michael Locklear

September 6, 2012 – The spot price of gold reached a six-month high today of $1712.90 as markets are excited over the announcement today of European Central Bank Pres. Mario Draghi that the ECB would initiate a virtually unlimited program for buying bonds in order to reduce borrowing costs for countries with in the euro zone that continue to struggle with their economies.

Low interest rates always benefit gold prices and if today’s decision results in the strengthening of the euro in relationship to the dollar then the gold rally could continue. Price gains today may be somewhat limited since the market is waiting to see what the US employment numbers will reveal tomorrow. The gold price move to about $1700 may increase the level of confidence among those investors holding long positions. Gold prices have moved up today because speculators got the news they were hoping for from the European Central Bank.

In his remarks today ECB president Draghi said:

Based on our regular economic and monetary analysis, we decided to keep the key ECB interest rates unchanged. Owing to high energy prices and increases in indirect taxes in some euro area countries inflation rates are expected to remain above 2% throughout 2012, to fall below that level again in the course of the next year, and remain in line with price stability over the policy-relevant horizon. Consistent with this picture, the underlying pace of monetary expansion remains subdued. Inflation expectations for the euro area economy continued to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. Economic growth in the euro area is expected to remain weak, with the ongoing tensions in financial markets and heightened uncertainty weighing on confidence and sentiment. They reviewed into syndication of financial market tensions would have the potential to affect the balance of risks for both growth and inflation.

It is against this background that the Governing Council today decided on the modalities for undertaking Outright Monetary Transactions(OMTs) in secondary markets for sovereign bonds in the euro area. As we said a month ago, we need to be in a position to safeguard the monetary policy transmission mechanisms in all countries of the euro area. We aimed to preserve the singleness of our monetary policy and to ensure the proper transmission of our policy stance to the real economy throughout the area. OMTs will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro. Hence, under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area. Let me repeat what I said last month: we asked replete within our mandate to maintain price stability over the medium term; we act independently in determining monetary policy; and the euro is irreversible.

Some analysts project that the new European Central Bank policy may not have the same beneficial impact on gold prices as previous announcements on monetary easing made by the Federal Reserve. There may be a simple reason for this, it is anticipated that further monetary easing by the Federal Reserve would almost certainly result in inflation which is good news for gold prices, however the policies announced today by the European Central Bank is not believed to contribute to inflation. Therefore where gold prices go from here still remains to be seen as we await the next meeting of the reserve.

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