Gold Market Report: Markets respond to a surprise rate cut by the ECB

Nov 8, 2013·Alasdair Macleod

Gold and silver hardly moved beyond a one per cent range all week until the ECB sprung on markets a surprise interest rate cut on Thursday. According to a Bloomberg poll only three economists expected it and sixty-seven did not.

Minutes after the ECB rate cut news markets refocused on a stronger than expected US GDP number of 2.8% versus 2% expected, which drove the dollar up and markets including gold and silver down. On the one hand we see the ECB taking a looser monetary stance, which is good for assets, and on the other the market saw an increased likelihood of tapering because the US economy shows a better than expected recovery.

The net effect was gold was marked down to $1297 before recovering to close at $1305, a fall of about $10 on the day. At the same time the US dollar jumped as much as 2c against the euro before settling 1c up. Equities and bonds also had a rough ride.

The ECB move is a response to falling price inflation in the eurozone and growing fears of deflation. Furthermore the rate cut may counteract the drying up of liquidity in secondary markets, which is blamed by many commentators on tighter bank regulation. If this tightness is allowed to persist it will become a threat to recovery, so the ECB's rate cut is intended to encourage monetary expansion to supplement bank credit.

The US GDP number on closer examination is less bullish for the dollar than first expected, reflecting an unexpected jump in inventories. Inventories can be tricky to analyse. It could be that they will fall in the current quarter, which will reduce the Q4 GDP number accordingly. Alternatively if inventory build-up is the result of slowing industrial demand, then it is an early sign of the economy stalling.

It is worth bearing in mind that many influential analysts are still bearish on gold, expecting it to break down below $1300 and challenge support levels at the $1260-70 level. With Indian demand out of the news and Chinese premiums falling (the result it seems, of the authorities telling banks to stop ripping off the market and not a reflection of falling demand), the scene may be set for a sell off next week. However, if the debate moves against tapering as I expect it will, the dollar should weaken and gold recover.

Next week
It will be a generally quiet week ahead for announcements, with Thursday and Friday being busiest.

Japan: M2 Money Supply, Economy Watchers' Survey.

Japan: Key Machinery Orders, Consumer Confidence.

UK: CPI, Input & Output Prices.

UK: Average Earnings, Unemployment Rate, BoE Quarterly Inflation Report.

Eurozone: Industrial Production.

US: Budget Deficit.

Japan: GDP.

Japan: Capacity Utilisation, Industrial Production.

UK: Retail Sales.

Eurozone: GDP.

US: Non-farm Productivity, Initial Claims, Trade Balance, Unit Labour Costs.

Eurozone: HICP (Final).

US: Empire State Survey, Import Price index, Capacity Utilisation, Industrial production.