Gold rises ahead of ECB meeting, EU debt summit

Prices creep cautiously higher as investors await Thursday's European Central Bank meeting and a two-day European Union summit later this week.

By TheStreet Staff Dec 7, 2011 1:47PM

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


Updated at 5:45 p.m. ET


Gold prices edged higher Wednesday as investors timidly moved into gold in advance of the two-day European Union summit.


Gold (-GC) for February delivery gained $13 to settle at $1,744.80 an ounce at the Comex division of the New York Mercantile Exchange. Gold has traded as high as $1,743.90 and as low as $1,723.60 an ounce while the spot price was up $13.70, according to Kitco's gold index.


Silver (-SI) finished down 12 cents at $32.63 an ounce while the U.S. dollar index was slightly higher at $78.53.


Investors were opting for gold Wednesday, although big gains will be tempered by a stronger U.S. dollar, which has recently been winning out as the haven asset of choice. With stocks struggling, gold could also be sensitive to liquidation should investors need to raise cash.


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The question is what will happen to gold when the European Central Bank meets on Thursday. Expectations are high for a rate cut and hints of more bond buying. However, there are several scenarios that could emerge.


The ECB could cut rates by 0.25% to 1%, as expected, but offer no suggestion of further monetary easing through increased bond buying. The rate cut is widely anticipated and might be priced into the short-term gold price. However, if the move is seen as euro-positive, gold will rally along with it. In addition, when inflation is high -- currently 3% in the eurozone -- and interest rates are low, the resulting negative real interest rate favors gold, as cash in the bank is worth less and gold becomes a more attractive place to store wealth.


However, if the ECB does appear willing to engage in more monetary easing, gold could rally. "If you look at historical precedent here in the U.S. as well as other parts of the world where central banks have implemented this loose monetary policy, these have been gold positive signals," said Will Rhind, head of U.S. investment for ETF Securities.


Under this scenario, Rhind thinks the euro and gold will diverge from their positive correlation as more money printing would devalue the euro and support gold.


What's more likely is the central bank will punt this decision until after the two-day European summit, looking for more fiscal union before intervening further in the market.


With the heat on eurozone leaders on Friday, the outcome is even more confusing.


If leaders fail to reach an agreement over the weekend, the news is likely to drag on the euro, which will hurt gold, despite the fact that haven buyers should be rushing into the metal.


"I think initially safe haven buying is not going to be there," says Rhind. "The nightmare scenario, which not many people want to see at all, is a breakup of the euro." Rhind thinks with a result that extreme investors could rush into gold.


If eurozone leaders agree on greater fiscal unity among nations that use the euro, gold could rally. Leaders are looking to implement changes to the European Union treaty that would still allow countries to make up their own national budgets, but would require them to answer to a governing board on their implementation. In addition there will be sanctions on any country that doesn't meet its 3% deficit target. If it is enough to appease the ECB, then the euro could rally with gold. If it falls short, a sell-off could result.


A third outcome could see leaders agreeing on how to leverage the European Financial Stability Fund, the eurozone's bailout fund. There have been many options floated, including trying to raise short-term funding using money from the ECB and/or IMF and offering insurance on sovereign bonds in addition to buying bonds. There has also been talk about turning the permanent bailout fund worth 500 billion euros into a bank and jumpstarting it in 2012. Any kind of strong bailout mechanism would help the euro and gold.


What is really missing for gold right now is its haven status. When investors panic they seem to be rushing into the dollar instead.


"In a three-month period where seemingly everything that could go right for gold has occurred, the fact that gold has failed to rally has many bulls on the metal scratching their heads," says Bespoke, which says that perspective is needed on the market. Gold is still up around 20% for the year. "Gold's performance this year is right in line with the average year-to-date return of the last five years."


The SPDR Gold Shares (GLD) backs up this claim. The most popular gold ETF holds close to 1,300 tons, indicating that while investors aren't buying, they also aren't selling.


Gold mining stocks closed mixed Wednesday. Barrick Gold (ABX) finished down slightly at $51.18 while Newmont Mining (NEM) gained 0.8% to $67.71. Goldcorp (GG) slipped 0.3% to $51.94, and NovaGold (NG) fell 1% to end the day at $10.85.




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