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Gold Higher as ECB Signals Will To Address Crisis

Release Date: 
Wednesday, June 6, 2012

The price of gold rose on Wednesday as U.S. productivity fell more sharply than expected and the euro strengthened. The euro zone stood firm on interest rates, although ECB President Mario Draghi said the market was underestimating the commitment of political leaders to address the eurozone crisis, and that "a few" members of the ECB rate-setting committee were in favor of a rate cut. Gold traded $20.40 higher at 7:00 a.m. Pacific Time on the New York Spot Market, trading at $1,638.30 per ounce. Spot silver was $1.21 higher, trading at $29.84 per ounce. (Click here for the most current spot prices.)

Revisions to U.S. first-quarter productivity data and unit labor costs showed productivity falling more than expected, at 0.9 percent lower, adding to concern over the economy.  Unit-labor costs increased 1.3 percent during the quarter.

"Gold's sharp rally after a vastly disappointing U.S. employment print last Friday and its ability to subsequently hang on to most of those gains is commanding attention," UBS said in a note. The bank says that this week is an opportunity for gold to "…pass the safe haven test." It appears to be doing so, the bank suggested. "So far, gold is attracting European buying and has traded up to the high of $1,637."

While the ECB left its key lending rate unchanged, "further easing can be accomplished by creative means at the ECB to bring liquidity into their market," said Jeff Wright, managing director at Global Hunter Securities. "Future easing measures by the ECB will have a similar effect on gold as the U.S. Federal Reserve's QE2 and "twist" did in 2011; due to prospect of future inflation beyond expectations." The ECB is expected to indicate a readiness to lower interest rates as early as next month but to refrain from making policy moves.

"The ECB doesn’t want to move ahead of the politicians, because it would remove their feet from the fire. But if we get more steps out of European politicians, moving towards closer fiscal integration, then it would free the ECB to do more, like cutting rates," said Josh Feinman, global chief economist for DB Advisors, Deutsche Bank’s institutional asset-management business."You could envision a virtuous cycle where we see some of the structural reforms and the ECB reinforces the good behavior with some monetary accommodation," he said.

(Source: "Gold futures climb by more than $20 an ounce," MarketWatch, June 6, 2012; "PRECIOUS-Gold hits 1-month high as euro, stocks rally," Reuters, June 6, 2012; "U.S. Stocks Rise Sharply," Wall Street Journal, June 6, 2012)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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