Gold Prices Gain Ahead of ECB’s Policy Statement

Gold prices settled higher on Wednesday as investors treaded with caution ahead of the European Central Bank’s (ECB) policy rate statement on Thursday, hoping to get some response from its President Mario Draghi over the recent sharp fall in Japanese Yen, which has triggered hue and cry from European leaders due to strong appreciation in the monetary union’s currency.

Moreover, weakness in the equity markets also boosted metal’s safe haven appeal.

“(Gold is ganing traction) ahead of ECB monthly meeting on Thursday and news conference with [the central bank’s President Mario] Draghi, which could show further color on ECB policy going forward,” said Jeffrey Wright, a managing director at Global Hunter Securities in a note to investors.

Gold futures for February delivery added $5.30 an ounce or 0.3%, to settle at $1,678.80.

The SPDR Gold Trust (ETF) (NYSE: GLD) ended the day 0.27% higher at $162.39.

Although French President Francois Hollande, earlier this week, urged his euro zone’s counterparts to set a mid-term target on euro’s exchange rate in upcoming EU summit where leaders will also discuss over budget issues, the ECB’s President Mario Draghi, is apparently not that bothered about the Yen’s sharp fall and its is widely anticipated that the central bank will keep the benchmark interest rate–unchanged, which currently is at 0.75%.

Due to the lack of clear direction, bullion investors are lately following movements in riskier assets and fluctuations in the currency markets.

“Perhaps bullion investors are just waiting for equity markets to decide on direction with the Dow Jones Industrial Average hovering around the key 14,000 psychological resistance level,” said Fawad Razaqzada, technical analyst at GFT Markets, in emailed comments in an emailed comments to clients.

However Razaqzada is still positive on gold. “A good assumption would be that gold and, perhaps, silver, would move in the opposite direction to that of the Dow. But whatever the equity market does, the long term fundamentals of precious metals remain sound, added Razaqada.

“Gold seems to have disconnected from most other markets as investors simply don’t know in which direction you will get the next $100 move,” commented Saxo Bank analyst Ole Hansen in a research note.

Year-to-date, bullion is almost flat as series of reasonably decent economic indicators from the U.S., China and Germany have dried up safe haven bets even as demand for platinum group metals has picked up due to positive outlook on global industrial production.

Although the Federal Reserve in its latest policy statement did not hint at curtailing the ongoing QE3, bullion investors are increasingly becoming edgy as U.S. macroeconomic outlook looks fairly rosy—considering the recent data.

“Certainly the stronger performance of more conventional assets, certainly equity markets, has taken the shine off gold,” Deutsche Bank analyst Daniel Brebner said in a research note.

“Safe-haven assets have performed fairly poorly as expectations of growth have improved… and a lot of those debt-related risks have for the time being faded into the background. In that kind of environment, there is no signficant motivation for gold prices to rise on the basis of investment demand,” added Brebner.

If the U.S economy continues to pick up the momentum then the Fed might halt altogether or scale down its QE3. The Federal Reserve is currently buying bonds worth $85 billion, every month to accelerate the economic recovery.

Quantitative easing, which entails excessive currency printing as the central bank tries to induce borrowings from government agencies to shore up the economy , lifts demand for inflation-hedge assets as investors fear currency debasement.

Meanwhile in some other precious metal markets, platinum futures for April delivery gained $29.30 an ounce or 1.7% to settle at $1,736.50 while palladium futures for March contract fell 65 cents an ounce or 0.1% to end the day at $764.80.

Silver futures for March delivery closed flat at $31.88 an ounce.

edliston

edliston

Ed Liston is a senior contributing editor at TheStockMarketWatch.com. An active market watcher and investor, Ed guides an independent team of experienced analysts and writes for multiple stock trader publications. He is widely quoted in various financial publications on the Internet. When Ed is not writing about stocks, investing in stocks, talking about stocks, or otherwise doing something stock related, he likes to go sailing and fishing in his yacht.