Gold Trends Up In Speculation of More Stimulus

Gold prices rose Wednesday, with investors anticipating a continuation of monetary stimulus by the U.S. Federal Reserve and possible additional stimulus from the European Central Bank.

Gold for June delivery fell $19.50, or 1.3%, to $1,452.60 an ounce on the Comex division of the New York Mercantile Exchange.

Silver futures is not as lucky, with the July contract down 76 cents, or 3.1%, at $23.43 an ounce.

After a two-day monetary-policy meeting on Wednesday, the Fed may be more gloomy about the outlook for the U.S. economy after a bout of weakening domestic data. However, the Fed announced that it will continue making $85 billion a month in asset purchases. Gold can benefit as a guarantee asset in a weak economy. Recently in April, drops in exchange-traded gold products and cuts in gold-price forecasts spurred a massive selloff, leaving gold futures down 8%, the worst performance for the metal in 16 months.

Slowing inflation is pushing the Fed to provide the economy with more liquidity and lower interest rates for longer. Chow Sang Sang Holdings International Ltd. (116) said that jewelry sales at its 44 shops in Hong Kong more than doubled in the two weeks ended April from a year ago. Last week, gold jumped 4.2 percent, the most in 15 months, partly as coin demand from mints in the U.S. and Australia soared after futures on April 15 plunged 9.3 percent, the most in 33 years.

Physical market activity slowed after a recent surge in the purchase of gold bars, coins and nuggets across Asia sent premiums for gold bars to multi-year highs. Gold’s sell-off last month has widened a gap between funds that sold on failure to satisfy on bullion’s underperformance and individual investors who could not get enough physical gold coins and bars at bargain prices.

“The key question in the near term is whether retail and jewelry demand can continue to counter ETP outflows and the rise in gross shorts,” Barclays Plc analysts Suki Cooper, Lynnden Branigan and Christoper Louney said in a report. “In our view, the vulnerability of further ETP outflows subsides should prices recover to above the $1,500 level or equity markets underperform, given the stronger correlation between the two.”

Investors expect European Central Bank to cut in its key interest rate from a current level of 0.75% as weak data from the euro zone continues to slump expectations. ECB announced that it cuts main interest rate by 25 bps to 0.5 percent. Gold went up on Thursday as the European Central Bank cut its interest rate for the first time in 10 months, rallying the metal’s inflation-hedge appeal a day after the Federal Reserve said it would keep up its asset purchases to stimulate growth. The metal was lifted by the ECB’s decision to lower its key rate by a quarter percentage point to a record low 0.5 percent, and it held out the possibility of further policy action to support the recession-hit euro zone economy.

Moreover, copper for delivery in July fell 11 cent, or 3.3%, to $3.08 a pound. July platinum shed $27.80, or 1.8%, to $1,479.40 an ounce, while June palladium futures fell $17.80, or 2.6%, to $680 an ounce.

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