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Liquidity Moves in ECB, China, UK May Boost Gold

Release Date: 
Thursday, July 5, 2012

Gold prices fell on Thursday along with the euro as the ECB, China and UK central banks either reduced interest rates or announced liquidity programs to help boost their economies. Gold was $12.00 lower at 7:04 a.m. Pacific Time on the New York Spot Market, trading at $1,605.70 per ounce. Spot silver was $0.63 lower, trading at $27.76 per ounce. (Click here for the most current spot prices.)

The ECB cut interest rates one quarter point to a record low of .75 percent on Thursday to help stabilize the Eurozone economy. The Bank of England left rates unchanged but launched a third round of quantitative easing for 50 billion pounds.

ECB President Mario Draghi said the region’s economy would recover gradually despite the current threat of sovereign debt and banks' unwillingness to lend. "The risks surrounding the economic outlook for the euro area continue to be on the downside," Draghi said. "Beyond the short term, we expect the euro area economy to recover gradually, although with momentum dampened by a number of factors. In particular, tensions in some euro area sovereign debt markets and their impact on credit conditions."

"Business surveys continue to point to persisting economic weakness in the euro zone and the UK. Both the ECB and the Bank of England...have gone beyond conventional policy by buying assets or providing unusually large loans to banks," Credit Suisse said in a research note.

"Overall, rate cuts by China, the ECB, and the U.S. are all positive for gold, on a slightly longer view than just one day for the simple reason that with inflation where it is, you start cutting interest rates of course then real interest rates get lower. So we see it as a bullish development for gold, and most of the other precious metals should be benefit from that," Walter de Wet, analyst at Standard Bank, said. "With lower interest rates comes greater liquidity, which is also positive for gold." He added, "We think gold will go above $1,900 in the last quarter on exactly these reasons."

Rick Rule, U.S. Chairman of Sprott Asset Management, said "in the midst of all of this chaos, I continue to believe that given the choice between gold as a store of wealth and a medium of exchange vs. the euro or the dollar, I am still attracted to gold." He added, "I’ve always been more given to fundamental analysis, rather than technical analysis.  Because of that, I actually feel better now than I did three months ago about the gold I have my portfolio, relative to the other ways I could hold my liquid wealth.  This is particularly true in the dangerous environment we face going forward."

(Sources: "Gold Swings Between Gains And Losses Before Ecb Decision," Bloomberg, July 5, 2012; "ECB cuts rates to new low, no move on bolder measures," Reuters, July 5, 2012; "PRECIOUS-Gold rises after China cut; focus on rates," Reuters, July 5, 2012; "ECB's Draghi: Euro Zone Economy Weak, Faces Risks," CNBC, July 5, 2012; "Rick Rule - The Big Money I'm Speaking With Is Frightened," King World News, June 27, 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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