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ECB Raises Rates But Potential Pause Lifts Gold

Release Date: 
Thursday, April 7, 2011

The European Central Bank (ECB) increased interest rates for the first time in three years as expected on Thursday, but comments from ECB President Jean-Claude Trichet signaling that the hike may not be the first in a series drove gold prices to record highs. The commodity traded at $1465.00 per ounce at 7:25 a.m. Pacific Time on the New York Spot Market.

The upward trend supports several analyst forecasts of gold reaching at least $1500 per ounce by the end of 2011 cited in a CNNMoney survey:

Ryan Detrick, Schaeffer’s Investment Research - $1750

Steven Goldman, Weeden & Company - $1600

Tyler Vernon, Biltmore Capital - $1600

Peter Cardillo, Avalon Partners -$1500

Fred Dickson, D.A. Davidson & Co. - $1500

Matt King, Bell Investment Advisors - $1500

Analysts at LGT Capital Management and CPM Group also commented on inflation, sovereign debt and geopolitical concerns supporting gold prices.

Portugal announced yesterday that it will seek a bailout from the European Union. The country’s political crisis increased borrowing costs to record levels and forced it to become the third country in the euro zone requiring a financial rescue. Portugal seeks a package that may be worth as much as 75 billion euros ($107 billion), two European officials said.

Gold prices have risen with fighting in Libya, Japan’s nuclear crisis and concerns about European debt and 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."

Carlos Sanchez, a precious metals analyst with the CPM Group, commented on the latest minutes from the U.S. Federal Reserve, which showed officials at odds about rising prices, which could potentially speed up the timing of the next interest rate hike. Unless that happens or the geopolitical situation actually stabilizes, gold prices will probably keep rising, said Sanchez.

"You still have several issues supportive of gold: the resurfaced sovereign debt issues in Europe particularly in Portugal, concerns about inflation, the U.S.'s fiscal trouble and a weak dollar," he noted.

 

(Sources: "Gold hits record after ECB signal on rates," Reuters, April 7, 2011; "PRECIOUS-Gold slips from record; ETF holdings lowest since May," Reuters, April 7, 2011; "Gold, silver and oil: The rally is back," CNNMoney, April 6, 2011; "Gold, Near Record, May Advance on Concern About European Debts, Inflation," Bloomberg, April 7, 2011)

 

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