from Ben Traynor
Thursday 8 March 2012, 08:45 EST
Inflation "Tying Hands" of ECB as Rates Unchanged in Eurozone and UK, Fed Reaction "Key to Precious Metals Case"
SPOT MARKET prices to buy gold were hovering around $1700 per ounce Thursday lunchtime in London, following the latest interest rate announcements from the European Central Bank and the Bank of England.
Silver prices meantime were hovering around the $34 an ounce mark Thursday lunchtime.
Earlier in the day, gold, silver, the Euro, stocks and commodities all rallied in early European trading, as reports suggested that enough Greek bondholders should agree to the bond swap by this evening's deadline. The bond swap would see private sector creditors take losses estimated at some 70%.
"[A bond swap failure] could trigger a default, resulting in contagion and a crippling credit squeeze," warned Swiss precious metals refiner MKS on Wednesday.
"When equities drop," adds one trader, speaking to newswire Reuters, "the pool of available funds for investing in commodities will shrink and gold will be in a bad position...gold is a very risky asset... when gold becomes volatile, it becomes much more volatile than currency or bond markets."
The ECB's Governing Council decided to keep its main policy interest rate at 1% Thursday.
"With energy prices rising, inflation is likely to stay above the 2% target throughout 2012," said ECB president Mario Draghi at today's press conference.
"That's tying their hands on rates for now," reckons said Klaus Baader, London-based chief Euro- area economist at Societe Generale, speaking before the decision.
Here in the UK, the Bank of England's Monetary Policy Committee today also voted to leave interest rates on hold, keeping them at 0.5%, where they have been since March 2009. The MPC left the size of its quantitative easing asset purchase program at £325 billion, after extending it by £50 billion at last month's meeting.
"Businesses running final salary pensions are being clouted by QE," says Joanne Segars, chief executive of the UK's National Association of Pension Funds.
"Deficits that were already big now look even bigger because of its artificial distortions."
NAPF estimates that lower yields on government bonds have added £90 billion to Britain's pensions shortfall. BullionVault meantime calculates that the average British wage earner has seen the purchasing power of their income eroded by the equivalent of £1410 since QE began in March 2009.
The US Federal Reserve meantime may now have too low a policy rate according to a long- standing monetary policy indicator, the latest commodities note from Standard Bank says.
The Taylor Rule, which signals where the Fed funds rate should be given prevailing inflation and unemployment, is indicating the current policy rate is too low notes commodities strategist Walter de Wet.
"Whether this is a bearish signal for precious metals in general and gold specifically depends on how the Fed reacts relative to what the Taylor Rule suggests," says De Wet.
"Should the Fed start raising rates, it could mean a rise in real interest rates, which would be negative for investment demand. However, should the Fed keep rates lower than what the Taylor Rule would suggest, we believe that the bullish case for gold especially remains intact."
The latest US Nonfarm payroll data, showing the number of private sector non-agricultural jobs added last month, are due to be released tomorrow.
German industrial productivity meantime rose more than expected last month, climbing 1.6% from December, official figures published Thursday show.
German politicians meantime are to review the Bundesbank's management the country's gold bullion reserves, much of which are vaulted abroad, following criticism of the central bank's inventory controls by the Federal Audit Office, German tabloid Bild reported Wednesday.
Switzerland's central bank announced a 2011 profit of SFr 5.4 billion on its gold bullion holdings Friday. The Swiss National Bank's total profit for the year was SFr13.5 billion, following a SFr19.2 billion loss in 2010.
Last September, following a period of Swiss Franc appreciation, the SNB announced it would peg its currency to the Euro at a rate of no lower than SFr1.20. Then SNB chairman Philipp Hildebrand stepped down in January after it emerged that his wife made a profit on a currency trade initiated before the peg announcement.
Israel has asked the US to supply it with so-called bunker-busting bombs and refueling planes, which "could improve its ability to attack Iran's underground nuclear sites", Reuters reports.
The size of the net long position of oil futures traders – which measures the difference between bullish and bearish contracts – "implies that we've already priced in a nine-month outage from Iran," reckons Citigroup oil analyst Tim Evans.
Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest- running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.
(c) BullionVault 2011
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.