Japan’s rate cut helps prices, but an analyst takes a cautious stance
By Myra P. Saefong, MarketWatch
TOKYO (MarketWatch) — Gold futures extended their record streak onto Globex during Asia’s Wednesday afternoon trading, with the Bank of Japan’s surprise cut in interest rates and further weakness in the U.S. dollar helping to lift prices for the precious metal above $1,350 an ounce.
Gold for December delivery (GCZ10 1,347, +6.80, +0.51%) was up $7.40 at $1,347.70 an ounce in electronic trading on Globex after tapping a high of $1,351. The contract had gained $23.50 Tuesday in New York to close at a record $1,340.30.
“The true reason for gold’s rise is the surprise Bank of Japan interest-rate cut and nothing else,” said Chintan Karnani, chief analyst at Insignia Consultants in New Delhi.
On Tuesday, the Bank of Japan voted unanimously to cut its policy interest-rate range to between zero and 0.1% and pledged to maintain its easy policy until prices stabilize. Read full report on Bank of Japan’s rate cut and easing measures.
“Interest-rate cuts are always positive for commodities and negative for the U.S. dollar,” said Karnani.
“Bank of Japan could set the precedent for future interest-rate cuts and further stimulus measures by the [U.S.] Federal Reserve and other central banks if there are any signs of an economic slowdown in their nations,” he said.
Cautious stance
From here, gold prices may rise further, but any move remains subject to technical factors, Karnani said. He sees the possibility of $1,450-$1,600 for gold by June 2011, as long as it continues to trade over $1,135.
On the other hand, Karnani voiced concern over the increase of retail investors in the gold market.
“Retail investors are the last to invest in any bull market and the first to exit,” he said. And right now, “every Tom, Dick and Harry has started investing in gold all over the world.”
“Funds have increased their allocation to gold,” he said.
Given all that, “a $150-$160 correction from the highs looks imminent in the next 45 days to 60 days in gold and, thereafter, gold will reduce the current pace of rise,” he said.
More fuel for the fire
Concerns over inflation arising from the quantitative easing policies by the U.S. Federal Reserve and European Central Bank have also fed gold’s rally, said Martin Hennecke, an associate director at Tyche Group Ltd.
Last week alone, the European Central Bank purchased 1.384 billion euros of euro-zone sovereign debt “to prevent/postpone” the bankruptcy of Ireland in particular, he said, pointing out that this amount was 10 times the €134 million of bond purchases in the previous week.
“We also see a strong gold demand from Asia as a result of the strength of the Chinese and Indian economies in particular, plus rising gold-mining costs supporting prices as well, as miners are finding it increasingly hard to replace their reserves in view of dwindling near-surface deposits/easily mineable gold supplies,” said Hennecke.
