Gold rallies on Greece, ECB rate cut

Prices climb as Greece nixes plans for a nationwide referendum and as the European Central Bank eases monetary policy.

By TheStreet Staff Nov 3, 2011 9:36AM

Image: Gold (© Anthony Bradshaw/Photographer)By Alix Steel, TheStreetTheStreet

 

Updated at 12:30 p.m. ET

 

Gold prices were rising Thursday as a feared Greek referendum on staying in the eurozone was reportedly scrapped and as the European Central Bank eased monetary policy.

 

Gold (-GC) for December delivery was adding $31 at $1,760.60 an ounce at the Comex division of the New York Mercantile Exchange. Gold has traded as high as $1,768.30 and as low as $1,724 an ounce while the spot gold price was up $23, according to Kitco's gold index.

 

Silver (-SI) prices were up 29 cents at $34.23 an ounce while the U.S. dollar index was down 0.1% at $76.99.

 

Gold had a tepid start Thursday, but reports that Greek Prime Minister George Papandreou has backed away from a controversial plan to hold a nationwide referendum on the country's eurozone involvement caused a pop in gold as the euro rallied, the dollar weakened and investors had less need for cash.

 

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The European Central Bank also eased monetary policy by cutting interest rates by .25% to 1.25%. The ECB had started on a rate tightening cycle earlier this year with the bank more concerned about inflation, currently at 3%, than growth. This is Mario Draghi's first meeting as president and he is changing Jean-Claude's Trichet's more hawkish stance. When inflation is higher than interest rates, cash in the bank is worth less and gold becomes more popular.

 

"Given the scale of the European and global debt crisis, the slowing U.S. and global economy and heightened macroeconomic, monetary and systemic risk -- a move back to $1,800 seems likely -- possibly in November," says Mark O'Byrne, CEO of GoldCorp, a bullion dealer.

 

But other experts are predicting a volatile ride for gold. "Traders are likely to remain cautious to the outcome of the G20 meetings as well as tomorrow's U.S. payrolls reading," says James Moore, research analyst at FastMarkets.com.

 

The list of uncertainties continues to grow. French President Sarkozy and German Chancellor Merkel gave Greece an ultimatum as the G-20 kicked off its two-day meeting, saying that the country will get no more bailout money until it pledges to stay in the eurozone. Without more aid, Greece will be unable to pay its bills by December. Another socialist party member, Eva Kaili , resigned from the ruling party in Greece, leaving Prime Minister Papandreou with only a one-seat majority a day ahead of his confidence vote. Meanwhile, the Fed hinted at, but didn't commit to, more quantitative easing, and the U.S. is bracing for October's jobs data.

 

Gold will continue to be at the mercy of currency fluctuations, as weakness in the euro means a stronger dollar -- which in turn makes gold more expensive to buy in other currencies, and vice versa. Any kind of pending financial disaster in Europe might trigger a flight to safety into gold, but also might force liquidation as investors are forced to cover losses in other assets.

 

Barclays thinks that the former has a chance of winning out for gold. "Market sentiment toward Europe continues to warrant some flight-to-safety behavior in the near term." Commerzbank also wrote in a recent note that "interest rates and therefore the opportunity costs of holding gold are still very low," meaning that persistent negative real interest rates leave gold as the more attractive asset to own.

 

The U.S. will release October's jobs data on Friday and expectations are that the private sector added 117,000 jobs, with 85,000 new jobs overall, while the unemployment rate is expected to stay at 9.1%, according to Briefing.com's consensus.

 

Wednesday's ADP employment report, which said the private sector added 110,000 jobs last month, has painted a more upbeat picture headed into the jobs report. BMO Capital Markets warns that the survey has diverged from the private sector payroll figure "widely . . . by an average of 62,000 in the past decade," but that it hasn't been the case in the past two months.

 

A positive number could boost gold as investors have less need to liquidate, or it could prompt investors to forget about gold and buy stocks. A negative number could trigger a rush out of gold into cash or could support haven buying. And the third possibility is that markets will care more about Europe than the U.S. and gold will still be held hostage by euro-dollar currency fluctuations.

 

"I do think that job growth will come in reasonably well," says Oliver Pursche, co-portfolio manager of the GMG Defensive Beta Fund. "I don't think that we will see 100,000 like the ADP report but it should be a positive number and reinforce our long standing view that there are improvements being made but they are very small and slow."

 

Pursche thinks that unless the payroll numbers falls to one extreme or another it is unlikely to really drive the gold market. The G20 meeting, the Greek situation and Italy and Spain are more in focus.

 

"I don't think you are going to see much movement. Gold prices have been driven by retail investors in the last 6 months ... I don't think we're at a point where there are any new fears that are driving significant assets into gold."

 

Supporting Pursche's point is the SPDR Gold Shares (GLD), which hasn't shed any tons since last Tuesday and is standing firm at 1,243 tons.

 

Gold mining stocks were rallying Thursday. Barrick Gold (ABX) was up 2.1% to $51.67, while Newmont Mining (NEM) was gaining 2.7% to $68.42. Randgold Resources (GOLD) continued to build on Wednesday's gains, adding another 3.1% to trade at $117.27, and Goldcorp (GG) was rising 1.5% to $51.42.

 

Two gold stocks to watch today will be Kinross Gold (KGC) and Yamana Gold (AUY) after both companies reported killer earnings. In midday trading, Kinross shares were up 1.1% while Yamana shares were soaring 3.4%.

 

Kinross earned 24 cents a share in the third quarter and gold production was up 13% year over year. Cash costs rose to $634 from $517 a year earlier but margins were still up more than 50%. The company reaffirmed its 2011 gold production guidance of 2.6-2.7 million ounces.

 

Yamana earned 26 cents a share on gold production of 279,274 ounces, up 4% from a year ago. Cash costs were $94 an ounce, factoring in silver sales, up 62% from the same period last year. The company reaffirmed its 2011 production guidance of 1.04 - 1.14 million gold equivalent ounces, which should increase to 1.7 million by 2014. Yamana also raised its dividend by 11%.

 

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