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The Bank of England preserving its official Bank Rate paid on reserves at 0.5 percent helped the spot market price of gold to climb to $1747.50 per troy ounce. Gold prices were further supported by the Bank’s vote to inject another 50 billion pounds into its financial system along with news of Greek leaders finally negotiating a deal on fiscal reforms.
By Dave Brown – Exclusive to Gold Investing News
Gold prices gained slightly following a combination of news developments from Europe. The Bank of England voted to inject another 50 billion pounds into its financial system and it also preserved its official Bank Rate at 0.5 percent. Greek leaders finally negotiated a deal on fiscal reforms and austerity measures.
All of these events contributed to send the spot market price of gold to $1747.50 per troy ounce, which represented a 1 percent appreciation to the previous trading session.
Negative real rates should strengthen gold price
Frank Holmes, CEO of US Global Investors explains his outlook on gold, “There is an $8 trillion rollover when you look at Japan, America and the EU, in the next 12 months. Having low interest rates, the future burden of the cost of interest is very beneficial to these central governments. History is replete with examples that whenever the government issues bonds that have a negative real interest rate, then gold [price] rises in that country’s currencies. We have most of the world issuing sovereign paper with negative real interest rates. That has always been beneficial to gold.”
Slow growth
In the United Kingdom, the economic recovery slowed last year, with activity falling slightly during the last three months. The rate of expansion in chief export markets has also been sluggish and concern about some euro-area countries’ debt and economic competitiveness are persistent. An anchor from difficult credit conditions presents a headwind. The correspondingly weak short term outlook for productivity means that a considerable degree of uncertainty is anticipated to persist. The Bank of England also expects the inflation rate to decline further as pressure from high unemployment and spare capacity is combined with a change in taxation policy from last year.
Fiscal reform in Greece
According to a statement from the press office of Prime Minister Lucas Papademos, the government has reached a deal on austerity measures that would be required for a $173 billion financing package. The full package must be approved by the European Union, International Monetary Fund and the European Central Bank by February 15 in order for legal paperwork to be completed in time to avoid a potentially messy default.
Bailing out Greece will boost the euro against the dollar for a while, making dollar-denominated assets such as gold cheaper and more attractive. This development should support gold prices further even if the Greek deal diminishes gold’s traditional safe haven status as recently it has traded less as a “risk asset” and more of a “currency” trade.
Attention back to the United States
For gold investors, the attention will shift until Friday afternoon when Ben Bernanke speaks and later when the Treasury Budget is announced. The street consensus on the budget expects a modest surplus for January. Over the past decade, an average surplus for the report period has been $10.9 billion. Over the last 5 years it has averaged a deficit of $5.8 billion, and for January 2011 the deficit came in at $49.8 billion. This will be of interest for gold investors as a lagging economic indicator of the broader financial context in the United States. If the budget misses expectations, gold prices could increase further in sympathy with the euro/dollar trade that has recently emerged.
