Gold surprises back to 13-month highs as ECBs monetary bazooka backfires
Gold investors were bracing for a major dip in the yellow metal Thursday upon the European Central Banks bombshell announcement of more quantitative easing and further cuts to its deposit rate, which already is in negative territory, along with other measures.
That gold-price drop occurred initially, because the easing and rate-cutting measures in the euro currency conversely tend to strengthen the dollar.
Gold pulls off powerful reversal: But then ECB chief Mario Draghi spoke at a post-meeting news conference and said the central bank probably would not cut rates further in the future. From todays perspective and taking into account the support of our measures to growth and inflation, we dont anticipate that it will be necessary to reduce rates further, he said.
Markets reversed, with U.S. stocks and oil prices both falling.
You had the dollar go up and then down, and gold followed the dollars lead, TD Securities strategist Bart Melek told Bloomberg. Gold has an inverse relationship to the dollar, typically.
The fact that the ECB cut rates but did not implement tiered-deposit rates turned out to be the kicker and another big disappointment to the markets other than gold, Tyler Richey of The 7:00s Report told MarketWatch.
Markets see beer goggles come off: For Peter Boockvar of the Lindsey Group, the negative reaction of stocks proves that central banks are running out of ammo. Were experiencing firsthand the end of the road of the influence central bankers can have on the market, he said. Central bank policy put beer goggles on investors, and now those goggles are coming off.
Boockvar added: Todays not a question of did Draghi do more or less than expected. Hes just doing more of what has not worked.
As a result, investors are flocking to what has worked so far this year: gold. The yellow metal rose more than 1% to finish near $1,270 and 13-month highs. Silver advance 1.7% to $15.53 and remains bargain-priced when compared with golds recent runup, the gold-silver price ratio indicates.
Gold could be taking swing at $1,307: With gold holding steady in 2016, some major investment banks and analysts continue to issue bullish forecasts and revised price targets. We are not overly concerned about the pullback we saw in the past two days, as we think golds uptrend remains intact as long as the metal closes above $1,246, ScotiaMocatta analysts wrote.
In our view, gold will likely consolidate here before taking a swing at $1,307, a price unseen since January 2015.
And Rich Ross of Evercore ISI issued a note forecasting bearish movements in the S&P 500. My Bullish tactical call is over, he wrote. While we have repeatedly highlighted 2030 as our upside target, the rapid post ECB reversals in the cross asset technicals dictates that we abandon our tactical view at this time in favor of a far more defensive posture. Our structural Bear Market call with downside to 1,670 remains intact. We would sell Global Equities and Commodity Currencies (BRL, CAD, RUB) on the back of recent countertrend strength and buy Gold.
Citi sees 30% odds for $1,425: And even before the ECB meeting, Citi Research was forced to revise its price targets upward, although it still thinks the gold rally could run out of steam in the second half of the year.
Nonetheless, it put a 30% probability on gold reaching $1,425 by years end because of a further exacerbation of somewhat elevated US and global growth concerns, perhaps even a global recession, which sends prices above $1,400/oz. in 2H.
Given the possibility of that bullish scenario, Citi raised its gold targets by 11% and 5% in 2016 and 2017, to $1,185 and $1,110, respectively.
Time will tell whether gold folds as the year progresses, but with 2016 so far marked by unexpected surprises, we might see Citi revising its forecasts even further by Q3 or Q4. The Feds rate-setting meeting next week will tell investors more about the metals near-term direction.