INZ: Gold price holds on to gains after ECB rate cuts
iNVEZZ.com, Friday, June 6: Spot gold jumped more than one percent to $1257.73 intraday yesterday, its highest price since May 30, after the European Central Bank (ECB) revealed a host of unconventional measures to combat the threat of deflation in the euro zone. The central bank outlined a 400 billion euro scheme to encourage banks to lend, while also announcing a charge on its overnight depositors for the same purpose. The precious metal had given up some of its gains by the end of the trading day and closed at $1252.59. The move has brought bullion’s 14-day relative-strength index to 35.71 since yesterday. It had been below 30, a bullish reversal sign according to some technical analysts, since May 29. The metal has been holding its gains today and was trading at $1254.40 as of 09:44 BST, positioning it for its first weekly rise in three weeks.
Researchers at UBS AG argue that yesterday’s advance was more “likely fuelled by short covering rather than fresh strength [since] gold gross shorts increased by 3.3moz or 38% [last week], amounting to the biggest weekly change in 14 years.” Traders with bets against bullion may have become nervous due to the ECB’s announcements, causing them to cover and thus increase buying pressure. George Gero, senior vice president at RBC Capital Markets Global Futures, agrees as he told the Wall Street Journal yesterday that “There [was] no new buying in gold […] just short covering."
Market participants are awaiting the Bureau of Labor Statistics’ monthly report on non-farm employment change today at 13:30 BST which they hope will give clearer direction. A disappointing reading may scare off additional shorts and give support to gold. Market expectations indicate that the US added 215,000 jobs last month following 288,000 in April. On Wednesday the ADP Research Institute reported that private companies created a net 179,000 jobs in May, the smallest addition in four months. Even if predictions are met and job growth turns out to have slowed in May, it would take a larger reading to “upset the view that the [US] economy is bouncing back strongly after a winter slump,” according to Reuters.
“ECB policy easing surprises the market and prompts gold buying,” Howard Wen, an analyst at HSBC Securities (USA) Inc., wrote in a note, as reported by Bloomberg. “The path for the euro is lower and this should weigh on gold. Investor focus will now shift to the upcoming U.S. jobs release,” he added.
“The rally is a reaction to the increased liquidity environment that ECB announced," Barnabas Gan, an analyst at OCBC Bank, told Reuters adding that gold will ultimately react to movements in the dollar, and US economic data that will determine the Federal Reserve's policy moves. "If that data surprises on the upside, gold should take a dip below $1,250 again,” Gan argued. The greenback-denominated metal tends to have an inverse relationship with the dollar and equities.
