Gold Futures Prices remain subdued ahead of some key central bank meetings this week, and the crucial U.S. jobs report on Friday. The Gold Futures Market also remains focused this week on the two-day FOMC meeting of the U.S. Federal Reserve, which started yesterday and ends today afternoon. The ECB – European Central Bank’s policy meeting and press conference is scheduled for Thursday. The BoE – Bank of England also meets to discuss its monetary policy, with results on Thursday. The Gold Futures as well as the physical Gold trading markets will be closely scrutinizing these central bank meetings for any fresh clues on the implementation of quantitative easing of monetary policies & so will the Equity Markets, the world over.
The RBI- Reserve Bank of India left interest rates unchanged on Tuesday (as expected) for the second straight review, showing that bringing down stubbornly high inflation is its top priority even as economic conditions deteriorate. The RBI left its policy Repo rate at 8% and cash reserve ratio (CRR) for banks at 4.75%. RBI cut its economic growth outlook for the fiscal year that ends in March to 6.5%, from 7.3% & also raised its headline inflation projection for March 2013 to 7% from 6.5%. As expected on the same, August Futures of MCX Gold trading shot up to Rs. 29930 in Intraday Trade.
RBI unexpectedly cut SLR – the minimum requirement for banks’ government bond holdings to 23% of deposits from 24%, a move to free up liquidity. RBI’s next rate review is September 17.
The ECB is expected by many to announce fresh monetary stimulus packages. This would be bullish for many markets, especially the Silver and the Gold Futures (at least initially) till the FED’s QE3 steps in. Gold Futures can be expected to sharply rise on the sheer size of the QE3 whenever it comes.
The Union Bank of Switzerland (UBS) raised its monthly Gold Prices forecast to $1,700 an ounce from $1,550/oz and its 3 month forecast to $1,750 an ounce from $1,600. According to UBS, a greater chance for monetary stimulus from the Federal Reserve would support Gold Prices, with the yellow metal seen rising to $1,700 an ounce in a month. The monthly Gold Prices forecast to $1,700 coincides with the Fed’s Jackson Hole symposium at the end of August, which could be significant for policy expectations ahead of the September FOMC meeting.
By the expanding open positions in the Comex Gold Futures for December delivery (data on CME Group’s Web site), Investors seem to be interested in buying physical Gold or enter more Gold Futures positions but are awaiting some signal from the US Federal Reserve on the outlook for monetary policy.
The Commodity Futures Trading Commission’s data indicates there is room for more of Gold Futures buying to enter. Further, technical charts favor a rally, and I expect that a move above $1,652.50 would set Gold Prices up for a break higher & will trigger Bullishness & then rises to $1693, $1747, $1783 & $1819 may also be seen.
The three month Gold Futures view by UBS takes into account, the action by the Fed and possible uncertainty surrounding the U.S. November Presidential elections and “the looming US fiscal cliff” where potential tax hikes and spending cuts occur. Seasonal Buying soon expected in India also supports a rally in Gold Futures Prices as the next 3 to 4 months are typically the strongest months for Gold.
During a landmark speech in London on July 26 ECB President Mario Dragi said the ECB was “ready to do whatever it takes to preserve the Euro.” Markets got a short burst of support this week when analysts said the European Central Bank (ECB) may restart a bond-buying exercise known as the Securities Markets Programme -SMP. Unfortunately, SMP alone isn’t likely to be enough to assuage concerns about the Euro-zone and its weaker members. There’s a plan afoot to have the ECB act as a bond buying agent for the European Union’s temporary bailout fund, known as the European Financial Stability Facility (EFSF), and its planned permanent successor, the European Stability Mechanism (ESM). ECB president Mario Dragi has been holding meetings across Europe to discuss the idea.
As per the EU summit statement, the ECB would act as an “agent” for the rescue funds, buying bonds on their behalf on the primary market. The primary market is where the borrowing costs of governments are determined–and the ECB isn’t allowed to intervene there. But the EFSF or ESM (once it’s operational) could buy government bonds on the primary market though the ECB. The only limit would be the size of the two rescue funds, which now have a combined firepower of over half a trillion euros, even after committed rescues, but which could be larger if they were leveraged.
Previous ECB bond purchases, now totaling about €212 billion, suffered from the fact that they had to be “sterilized”–that is, for the equivalent amount of cash to be sucked out of the money supply to prevent inflation–which somewhat limited how much the central bank could buy. By contrast, the rescue funds will be able to buy debt per their extended mandate, without restriction other than their funding capacities, reports Bloomberg.
This approach would sufficiently benefit Italy and Spain, the third and fourth largest euro economies. Unfortunately, it would have an even bigger impact on Germany, whose three-year note yields are already below zero. For this reason, some argue that if the ECB is to take this route, it might as well call its action “Quantitative Easing” and leave the EFSF and ESM out of the equation. But QE is politically charged and not on the cards anytime soon.
Perhaps most importantly for the Germans, any purchases by the EFSF would be subject to “conditionality,” since governments would have to request the transactions. This would ensure the continued independence of the ECB while curtailing the bad incentives and “moral hazard” that the Bundesbank fears could result from overly lenient monetary policy.
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