Gold Gains as Money Markets Have Almost Stopped Functioning

By: Ben_Traynor

U.S. DOLLAR gold bullion  prices rose to $1853 an ounce Thursday morning London time – 3.5% down on Tuesday's all-time high.

Major commodities fell while stocks and government bonds were slightly up, on a day which saw both the European Central Bank and the Bank of England leave monetary policy unchanged.

"Gold continues to trade in a wider and more volatile range," noted one London-based dealer this morning.

"Most sell orders are parked close to the $1900 level," added a gold bullion dealer in Singapore. 

"So long as we stay in the range of $1800 to $1900, the bullish trend is pretty much intact." 

On the downside, however, "a break of $1704 would confirm a double top is in place and would target $1488 on a measured move," reckon technical analysts at bullion bank Scotia Mocatta.

Prices for silver bullion meantime rose to hit $42.38 per ounce around lunchtime – a 4.5% move in less than 24 hours.

The European Central Bank left its main policy interest rate unchanged at 1.5% on Thursday. Jean-Claude Trichet is due to give his penultimate post-decision press briefing on Thursday afternoon, which will be watched for hints of where ECB policy might go next. 

"The debate in the markets has moved to rate cuts but I doubt it will happen," says Gilles Moec, co-chief European economist at Deutsche Bank in London.

"The situation is very, very bad, the money markets have almost stopped functioning."

The ECB has raised rates twice this year – in April and July – each time citing the risks of inflation.
Trichet's language at the press conference "will probably shift to neutral on inflation and downside risks to growth, which is enough to flag that the ECB is on hold," reckons former ECB economist Laurent Bilke, now at Nomura.

"It is very unlikely that the ECB would do a massive U-turn so soon...that is just not how it operates." 

"The experience of late 2008," counters Jacques Cailloux, chief European economist at Royal Bank of Scotland, "indicates that the ECB can change course very quickly."

In July 2008 he ECB raised its rate from 4.00% to 4.25%. Following the collapse of Lehman Brothers later that year, however, the ECB cut its rate seven times between October 2008 and May 2009, when it reached 1.00%.

Here in the UK, the Bank of England's Monetary Policy Committee voted Thursday to leave its interest rate at 0.5% – where it has been since March 2009. The MPC also voted to leave asset purchases at £200 – rather than increase them with a second round of quantitative easing.

"The time to launch QE2 has arrived...in order to avoid the risk of a double-dip recession," said Graeme Leach, chief economist at business lobby group the Institute of Directors, speaking before the announcement. 

Over in the US President Obama is due to give a speech on job creation later on Thursday, where he is expected to outline proposals worth around $300 billion in spending and tax cuts.

"We don't feel that the plan will be received by market participants as a cure for the US economy's problems," says Marc Ground, commodities strategist at Standard Bank.

"Consequently, the current optimism should prove to be short-lived, with a return of investors to safe-haven assets imminent...we feel sentiment will soon turn in favor of gold, as uncertainty and Eurozone concerns are reignited."

Shortly after taking office in January 2009 Obama announced a stimulus package worth around $800 billion. The American Recovery and Reinvestment Act became law the following month.

An estimated $710 billion in stimulus funds has been spent since, according to US government-run website recovery.gov. The unemployment rate for August was 9.1% – up from 7.8% when the stimulus package was first announced.

The Organisation for Economic Co-operation and Development announced Thursday that it has significantly reduced its global economic growth forecast.

"Growth is turning out to be much slower than we thought three months ago, and the risk of hitting patches of negative growth going forward has gone up," said OECD chief economist Pier Carlo Padoan.

The OECD now thinks that G7 economies excluding Japan will grow at an annualized rate of less than 1% for the remainder of the year.

By Ben Traynor
BullionVault.com

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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

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