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Gold Rises as ECB Holds Interest Rates

Release Date: 
Thursday, January 12, 2012

Gold prices were higher on continued demand from Asia, events in Europe and a lower dollar. The price of gold rose on the New York Spot Market, trading at $1660.00 per ounce at 6:35 a.m. Pacific Time with silver higher at $30.54 per ounce.

The euro rose against the dollar after a well-received auction of Spanish bonds: a much needed positive result in the euro zone's fight against debt problems. In a separate much-watched auction, Italy sold their targeted allotment of government bonds even though the bonds were paying a lower average yield.

The European Central Bank (ECB) left interest rates unchanged today. Markets will be closely watching the wording of an expected ECB statement for signs of further monetary easing. The ECB's benchmark interest rate has never gone below its current level.

"We may see a slightly more dovish statement regarding long-term operation rates and bond buying, new liquidity measures," said LGT Capital Management analyst Bayram Dincer. This would likely boost gold prices, he said.

European Central Bank President Mario Draghi stressed that economic performance in the euro zone will be subdued due to heightened uncertainty and inflation will develop in line with the ECB's price stability. Draghi said "substantial downside risks to economic outlook for the euro area continue to exist in an environment of high uncertainty, they notably relate to further intensification of euro area debt markets tensions."

The ECB rate decision follows news that German gross domestic product fell by 0.25% in adjusted terms in the fourth quarter. If the statistics for the euro zone's largest economy are confirmed later next month, it may indicate the euro zone is moving towards economic contraction or recession.

In a note to clients, analysts with Commerzbank said gold "is living up to its reputation as a safe haven..." as some of the recent price weakness appeared to be over.

(Sources: "Draghi Warns Euro-Zone Economy Will Remain Weak," Wall Street Journal, January 12, 2012; "PRECIOUS-Gold rises as Spanish bond sale lifts euro," Reuters, January 12, 2012; "Gold extends gains after ECB, lower dollar," MarketWatch, January 12, 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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