Surprise ECB Move Overshadows Poor Jobs Report
In the shadows of the Twitter IPO, the European Central Bank cut its benchmark interest rate to a record low Thursday in an attempt to improve the euro zone economy amid falling inflation.
Many precious metals bugs foresaw that a poor jobs report (on delayed numbers due to the government shutdown) would lead a rally in metals. Instead, nearly $15 were shaved off the gold price by the end of trading Thursday.
The E.C.B cut its central rate to an unprecedented 0.25 percent from 0.5 percent, which was already at a record low. ECB is clearly nervous. It has been the defining economic issue of the day. The aftermath US equities and world equities are down, although some eurozone indexes did close up less than 1%.
The central bank is reacting to a sudden drop in euro zone inflation, which fell to an annual rate of 0.7 percent in October, which is below the ECB official target of 2 percent. The scare of deflation forced the central bank into its position.
Economics and political leaders are happy with the decision, which strengthened the dollar against the Euro, and explains the down day for gold.
Euopean stocks were mixed on the news. Exchanges in Paris and Frankfurt initially increased more than 1 percent and then fell flat, while the euro fell more than 1 percent against the dollar. A cheaper euro makes European products less expensive overseas.
The ECB is more concerned about deflation and slow growth, and this decision to cut to .25 percent leaves the ECB with little room to maneuver if economic conditions worsen.
The decision may also be received with dismay in Germany, where concern about excessive inflation has deep roots. The ECB cannot risk alienating Germany, which has the largest economy in the euro zone.
“Deflationary risks and the stronger euro seem to have motivated the E.C.B.’s move,” Carsten Brzeski, an analyst at ING Bank, said in a note to clients. “It is obvious that the E.C.B. under President Draghi has become much more proactive than under any of his predecessors.”
The ECB’s main focus is to defend price stability. Most analysts expected the ECB to wait until December to act, once there was more economic data available.
Mr. Draghi said interest rates would stay low for an extended period of time. The central bank will also keep supplying cheap loans through mid-2015.
Gold slid on the news, settling at about $1,308.50 per ounce. Gold gave back most of its gains from Wednesday, when futures prices increased from a three-week low as a weaker US dollar helped boost demand ahead of Friday’s nonfarm payrools report.
“Precious metals, like all the other markets, came to life when the ECB surprised everyone with a 25 basis-point interest-rate cut,” said Fawad Razaqzada, technical analyst at GFT Markets.
Where will gold go from here?
Gold can’t go much lower. We’ve been in a bull market for ten years, and now, since 2011, we have experienced a classic correction. But, we’ve clearly experienced robust support at the $1300 level. Gold simply doesn’t want to tango once more with the $1,200 handle.