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Gold prices have rallied to record highs, supported by their “safe haven” appeal for investors seeking shelter from economic uncertainty and a means to guard against inflation.
By Leia Michele Toovey- Exclusive to Gold Investing News
On Thursday, the European Central Bank announced that it would hike benchmark interest rates by 25 basis points. The rate hike should have sent gold prices downward; however, following the news, gold was modestly up by 50 cents to 1,529.70 a troy ounce on the Comex division of the New York Mercantile Exchange, with traders commenting that trading volumes were low. Higher interest rates tend to retard investor demand for gold, which earns no interest, and instead, increases the appeal of interest-earning investments such as treasuries. Gold’s modest upside in the face of the interest rate hike could be attributed to a jump in the Euro relative to the greenback thereby increasing the demand for US dollar-based gold. The Euro’s rise was solidified by a statement from ECB President Jean-Claude Trichet, commenting that the bank would continue to accept Portuguese bonds as collateral even if the country’s credit rating is cut to “junk” status.
Another explanation for gold’s hardiness, despite the interest hike, is the metal’s overall strength and momentum, with traders commenting that the gold market is “so strong” that it was able to “shake off” the rate hike. Friday, the downward pressure on gold was overshadowed by a shocking employment report out of the US which stated a meager addition of 18,000 non-farm employees to payrolls in June; analysts had expected 105,000. The news was interpreted as a sign that there are more tough times ahead for the global economy, and investors fled to the safe-have investments. As a result, gold spiked to $1,538 per ounce in early morning trading.
ETF interest
Despite gold’s ability to maintain its upward trajectory, analysts are cautioning about a potential leveling off, or even reversal on the horizon, supported by an underlying fundamental shift in gold market holdings. One of the key developments is the fact that fund flows into ETF’s are starting to decline, according to recent data from the Royal Bank of Scotland. The RBS report showed that holdings in gold ETFs have dropped 16 tonnes this year to 2,244 tonnes by the end of June. In addition, in the gold futures market, net long positions, or bets on further price gains, held by speculators on the COMEX exchange in New York have dropped 17 percent, according to the most recent data- released the week ending June 28.
At this point, there seem to be an equal amount of bears and bulls issuing their opinions over the future price of gold. Many of the bears believe a decline is imminent, as the greenback is due for a correction, and China will probably continue to hike interest rates. The United States’ debt ceiling is a key factor in the greenbacks near term, and with the deadline near on the horizon, a lifting of the debt ceiling is expected to be decided upon, very soon. While negotiations are down to the wire, no one expects that the US will not meet its deadline and suffer the consequence of a credit downgrade. President Obama has stated that a deal on long-term debt reduction should be reached by July 22.
Low central bank demand
The demand to borrow gold from central banks has dropped dramatically, and as a result central banks are pulling out unusually high amounts of gold from the Bank for International Settlements (BIS). In the last year central banks have withdrawn more gold than they have in the past decade, according to the BIS’s annual report. Central banks hold bullion in their reserves, and earn an income by lending out the gold. Historically, the largest borrowers of this gold has been gold miners who borrow the gold for hedging, which allows them to sell their gold forward, at predetermined prices. Hedging is not in the best interest of miner’s when gold prices rise, hence the recent decline in demand. As demand has collapsed, and interest rates staggered, banks are pulling out their gold, and in some cases, choosing not to lend their gold at the current, rock-bottom interest rates.