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Euro Rate Hike Expectations Boost Gold Prices

Release Date: 
Monday, April 4, 2011

With the European Central Bank expected to raise interest rates for the euro this week, the dollar turned lower against the common currency and gold prices gained. The metal traded at $1437.60 per ounce at 5:58 a.m. Pacific Time on the New York Spot Market. Analysts at Commerzbank, UBS and Investec Australia commented on the euro and other potential market movers for gold.

"There are a couple of things driving gold prices at the moment, and these are not short-term arguments," said Commerzbank analyst Daniel Brisemann. "One thing is the probable ECB rate hike, given the inflation outlook. Other things are geopolitical risks in North Africa and the Middle East, as well as the weak U.S. dollar." Expectations of depressed real interest rates and a weaker dollar are generally seen as positive for gold prices.

"These things altogether account for the recovery in gold prices today," Briseman added. "Probably the downward move on Friday was seen as exaggerated by many market players, and they took the lower price as an opportunity to get into gold."

"We saw the continuous geopolitical risk in the Middle East crisis, and oil prices going higher. It certainly looks to methat gold has been tracking both oil and euro quite closely inpast few days," said Darren Heathcote, head of trading at Investec Australia.

William Dudley, president of the New York Federal Reserve Bank, said the Fed was "still very far away" from achieving its mandate of maximum sustainable employment and price stability, although the economy is on a firmer footing. The comments from one of the Fed’s most powerful policymakers counter the bias towards raising rates among other Fed officials. "Dudley's comments Friday underlined the lack of consensus on the FOMC. This policy divide is gold-positive," said UBS analyst Edel Tully in a note.

(Sources: "Gold Firms as Dollar Retreats, Oil Climbs," CNBC, April 4, 2011;"PRECIOUS-Gold edges up on high oil prices, euro strength," Reuters, April 4, 2011)


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