Gold Reacts to Greek Debt Deal Completion and Central Bank’s Reflationary Policy
As of Asia open on 9 March, Comex April gold futures is trading around $1,700, bouncing 2.2% from the recent trough of $1,663. Similarly, S&P rebounded 1.9%, Euro, 1.2%, oil, 2.2% from the lows on 6 or 7 March. Correlations among all asset classes are familiarly high because securities and commodities are reacting to 2 major events: first, the outcome of the Greek PSI; second, central banks’ money-printing actions.
At the time of this writing, the Greek government has just announced that 85.8% of private investors have accepted the Greek debt deal while total participation would approach 95.7% using the CACs. Given the near-term correlation and improved sentiment, higher equity prices will likely lift up prices of all commodities including gold.
The ECB on Thursday decided to keep interest rate at 1 percent so did the Bank of England which left interest rate at a record low of 0.5 percent. In mid-February, the Bank of Japan engaged in QE2 by keeping interest rate close to zero and pledged to step up asset purchase until the goal of 1% inflation is reached. This week, the Fed may also contemplate a different version of asset purchase program. JP Morgan estimated that the major central banks’ (US, UK, EU, Japan & Swiss) balance sheet as a percentage of GDP is currently about 27% compared to about 11% in 2007. In the long run higher inflation becomes inevitable due to all the central banks’ actions.
Coming back to gold, Barclay’s analyst Suki Cooper believed that the macro picture and investor flows are still positive for gold although dollar’s uptick and risk reduction can dampen gold’s strength from time to time. The key is whether or not the physical gold market especially the demand from Asia would continue to act as a support to gold prices as it did last Thursday and whether the long-term money would bulge to volatility and little sign of inflation in the short run.
Sharps Pixley, London
09 Mar 2012 | Categories: Gold