Analysts See Short-Term Boost For Gold, Euro Thursday With No New ECB QE
Frankfurt (Dec 2) The gold market has been extremely volatile, with major prices swings seen in the last few days and analysts are expecting the ECB meeting will add to the mix as expectations have been growing that central bank president Mario Draghi will announce an expanded asset-backed purchase program and buy government bonds.
As recently as Nov. 21, Draghi said the ECB is willing to increase its efforts to stimulate the Eurozone’s struggling economy.
However, some analysts said it is still too early for the central bank to expand its purchase program and the lack of new information could help drive the euro higher, on initial short covering, and in turn boost gold prices.
Bill Baruch, chief market strategist at iiTrader, said that the weaker-euro-stronger-U.S.-dollar trade appears to be losing some momentum as the U.S. Dollar Index, which is heavily weighted against the euro, runs into strong resistance around the 89 level.
He added that Draghi likes to talk down the euro during his monthly press conference, following the monetary policy meeting, but that could prove difficult on Thursday if he doesn’t announce new concrete initiatives.
If Draghi doesn’t announce that the ECB will start to purchase government bonds, Baruch said that he would expect traders to cover some of their short positions in the euro, which means buying the single currency and selling U.S. dollars.
However, even if gold does get a boost on Thursday, it might not have enough power to break through initial resistance at around the $1,221-an-ounce level, he said.
“After the big swings in the last few days, I think we will find ourselves in a consolidation pattern this month ahead of nonfarm payrolls and the Federal Reserve (Open Market Committee) meeting,” he said. “There is a risk that the euro moves higher but gains will be limited.”
Analysts from Capital Economics said that although central bank officials have openly discussed the possibilities of buying government bonds, they are not expecting a new purchase announcement until the 2015.
Peter Buchanan, senior economist at CIBC agreed, saying that he is expecting the ECB to hold off on announcing new initiatives, at least until they determine the impact of lower oil prices on the economy. Although weaker crude prices are deflationary they are also a major tax break for consumers, he said.
“Central banks are still grappling with lower oil prices and I don’t think they will make any decisions until they know the full impact on the economy,” he said.
Buchanan added another factor against the ECB expanding its asset-purchase program is continued resistance from other central banks, most notably the German central bank.
Although a euro rally on Thursday could provide some short-term momentum for gold prices, Buchanan also explained that overall it is bearish for the yellow metal as the ECB will not loosen its monetary policy, pushing down inflation expectations, a significant driver of the gold market.
Expectations for further QE initiatives are a close call as European economic growth remains weak and inflation expectations hover near historical lows; for some market participants, there is a feeling of urgency for the central bank to act aggressively.
Currency analysts from BNP Paribas said that they are expecting the ECB to announce that it will buy sovereign debt at Thursday’s meeting, which would be negative for the euro and negative for gold prices. They said the euro looks “under-positioned” ahead of the monetary policy meeting.
“We think comments from President Draghi and Vice President Constancio are likely to prove more instructive—both made supportive remarks on the merits of sovereign QE and seem unlikely to have delivered this message without being confident in their ability to deliver new announcements this week,” they said.