Gold price buoyed, further EU woes prompt flight to safety

Otmane El Rhazi from The Bullion Desk.

The gold price remained buoyed on Wednesday morning after poor European inflation data added to the prospect of quantitative easing in the eurozone.

The spot gold price at $1,214.80/1,215.50 per ounce was 80 cents lower than its Tuesday closing level – the metal has traded within a $7 intraday range so far, peaking at $1,219.20.

The CPI flash estimate at -0.2 percent undershot the expected 0.3 percent and the retail PMI was lower at 47.6, while the unemployment rate was as expected at 11.5 percent.

The drop into negative territory in the inflation rate will pile more pressure on the European Central Bank to commence unconventional monetary policy measures to stoke inflation. The figure remains well short of the bank’s two-percent target, although the core figure at 0.8 percent was better than expected.

“A negative year-on-year change rate will probably prompt the ECB to already announce large-scale government bond purchases at its next meeting on 22 January, which should benefit gold,” Commerzbank said in a note.

Despite the obvious sign of eurozone weakness, gold prices remain up nearly three percent so far this year, with safe-haven buying prevailing over a dollar that is close to a nine-year high against the euro at 1.1856.

While the continued decline in oil prices is seen as the main factor in the eurozone’s fall into deflation and typically dampens the environment for gold prices, it has instead spurred more safe-haven buying, HSBC’s James Steel said.

“Normally low oil prices are gold-bearish. But as oil’s price decline is linked to equity weakness and macroeconomic concerns in oil-producing states, gold is benefitting from a safe haven bid,” Steel said.

Brent crashed through $50 per barrel this morning to $49.52 though it has since recovered to $51.08.

Looking ahead, many investors will scrutinise the FOMC minutes for clues as to when the US may choose to increase interest rates, particularly ahead of the blockbuster non-farm payrolls data on Friday.

“The FOMC minutes to be released later today could draw some attention from market participants, particularly given the lack of consensus in interpreting the FOMC statement last month. The details should provide further insight and help set the tone for policy expectations up ahead,” UBS’ Edel Tully said.

“A stronger-than-expected payrolls report would exert some downward pressure on gold and potentially spook some recent weak longs,” she added.

The ADP non-farm employment change, the US trade balance and a speech from FOMC member Charles Evans are also due later.

In the other metals, silver at $16.30/16.45 per ounce was unchanged, while platinum at $1,217/1,222 was up $3 and palladium at $795.801 was down $2.

(Editing by Mark Shaw)

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