Gold hits 3-week highs as World Bank slashes GDP forecasts and ECB expands QE
Gold topped $1,260 to hit three-week highs Wednesday, rising more than 1% just one week away from the Federal Reserves June 14-15 meeting. Meanwhile, silver broke through the $17 level for the first time in three weeks.
Gold could easily see a further $20 an increase, given favorable macroeconomic news, MKS trader Afshin Nabavi told Reuters. I'm thinking we could see $1,290-$1,300 in the short term, trader Eric Zuccarelli said in a CNBC appearance.
The shockingly bad May jobs report issued last week, along with Fed chief Janet Yellens wishy-washy speech Monday, remains fresh in investors minds. And certainly, fading expectations of a Fed interest-rate hike helped fuel the metals higher, but thats not all.
New monetary amphetamine unveiled: The European Central Bank has picked up where the Fed left off, delving into negative rates and launching its own quantitative-easing program. ECB buying of government bonds has pushed yields down to records, with more than40% of securities in the Bloomberg Eurozone Sovereign Bond Index offering negative yields, Bloomberg reported.
But the ECBs QE program went a step further Wednesday as the central bank for the first time purchased corporate bonds issued by some of Europes largest companies in a desperate attempt to stimulate the EU economy.
The ECBs monetary amphetamine has driven gold above the key $1,250 level, Tai Wong of BMO Capital Markets wrote. ECB chief Mario Draghis determination to drive rates ever lower fires up investors appetite for gold.
Brexit is another reason for gold: And, of course, concerns about the looming June 23 Brexit referendum on whether the United Kingdom should quit the European Union also is helping gold. If there was going to be a vote to leave, it would boost gold, if only because it pushes the Fed back again, Macquarie analyst Matthew Turner said. And CNBC contributor and trader Jim Iuorio noted, I like the gold trade and Im going to stay with it because I think the euros going higher. And if the euro starts to go lower, that might mean because were worried about the Brexit, and that might be another reason to buy gold.
But gold had another catalyst to run higher Wednesday. The World Bank became the latest global economic agency to downgrade its global growth forecast, slashing its 2016 target to 2.4% from its January estimate of 2.9%, citing stubbornly low commodity prices, sluggish demand in advanced economies, weak trade and diminishing capital flows, Reuters reported.
The World Bank also followed the lead of other organizations in cutting its U.S. growth forecast by eight-tenths of a percent, to 1.9%.
So, clearly, its not the Fed alone thats increasing golds allure. We believe focusing on the Fed alone is simplistic and only drives very near-term sentiment and volatility, argued Jessica Fung at BMO Capital Markets. The potential impact of sluggish global growth on the U.S. economy should not be ignored.