Gold prices had a rollercoaster ride early this morning, as markets digested the new actions from the European Central Bank. After dipping as low as $1,238 an ounce in the immediate aftermath of the ECB’s announcement of aggressive monetary moves, gold shot up over $35. A sudden influx of investors “buying the dip” was boosted by ECB president Mario Draghi telling reporters that this is likely the the last rate cut into negative territory.
At 10 am, gold is at $1,266 an ounce, up $13 from yesterday’s close, and still gaining nearly vertically on the charts.
The extent of the ECB’s new stimulus measures were an unexpected surprise for European markets. The central bank lowered all of its benchmark interest rates, extended new long-term 0% interest loans to banks, and announce that it would be printing an extra €20 billion a month to be used in buying corporate bonds.
The ECB cut the excess reserves interest rate deeper into negative territory, from -0.3% to -0.4%, in an effort to push banks into lending more. A side effect of the negative rates is to squeeze bank profits. Most banks are eating the expense imposed by the ECB instead of raising fees on customers. This weakens the bank’s balance sheet, making it less likely, not more likely to lend.
The party in the markets was quickly snuffed out, when ECB president Mario Draghi told reporters that this last, deeper dip into negative interest rates was likely the last.He noted the dangers of negative interest rates, and said that the ECB could not cut them as deeply as they would want. His statements caused the euro to quickly reverse course, rising from a loss to shoot to a 2-1/2 week high. This pulled the dollar down from a 1.3% gain into negative territory.
All the action this morning ended up being good for gold. In a deja vu-type day, gold is once more taking off after an ECB rate cut. The early dip brought out buyers, and Draghi’s tossing cold water on the market rally weakened the dollar.
Gold this morning is remarkably higher, testing resistance at $1,265. If it can break its way through this level, $1,272 is probably the next hurdle. While the $1,243 support level failed to hold overnight, the $,1238 level did.
April gold closed down $5.50 Wednesday, to settle at $1,257.40. A 5% gain in crude prices resulted in a jump in energy stocks, which contributed to a risk-on mindset in the markets. Spot gold closed at $1.252.90, down $8.10. Analysts were not overly concerned regarding this week’s consolidation, noting it was really past time to see a correction to the scorching rally gold has seen since the first of the year.
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