Bank of Japan Shift Lifts Gold Prices

September 21st, 2016 by

yenA shift in monetary policy by the Bank of Japan caught investors by surprise today, lifting gold prices. Spot gold was up as much as $16 an ounce immediately after the Japanese central bank’s statement, before stepping back modestly. The yen, which had fallen on the release of the BoJ’s statement, soon rallied to a more than 3-week high, as a sign of “no confidence” by the market that the central bank could achieve its objectives. This drove the dollar back into the red, lending more support to gold prices. The British pound was also pummeled, hitting a 5-week low versus the yen.

At 10am in New York, gold was trading at $1,326.00, up $11.40 from yesterday’s spot close. Spot silver was trading at $19.63, up $0.32 from Tuesday’s spot close.

Statements by Bank of Japan boss Haruhiko Kuroda were taken by market analysts as a sign that the central bank is looking to reduce its quantitative easing/money printing, switching its focus to the yield curve of Japanese government bonds. The new policy is on controlling the yield curve, using the benchmark 10-year government bond. The central bank will now intervene in the markets to keep the 10-year yield at or close to 1%, giving battered banks some reprieve from the damage caused by negative interest rates. While Kuroda said that this policy shift would have no immediate effect on the BoJ’s bond purchasing program, central bank intervention in the markets in the future will depend on the yields of long bonds.

yellen-watchAll eyes now turn to Washington DC, where the Federal Reserve is due to release their policy statement at 2pm. While the CME Group FedWatch tool still forecasts only a 15% chance of a rate hike today, some economists are squirming in their seats ahead of the report. They hold a higher chance of the Fed reacting to recent economic signals, and the surprise in Tokyo this morning, might encourage Fed boss Janet Yellen to move.

In separate news, a combination of a workers’ strike on North Sea oil rigs, and a big surprise in US crude stockpiles, has oil futures up more than 2% this morning. The American Petroleum Institute reported a 7.5 million barrel draw. Market analysts were expecting a build of more than 2 million barrels.

Gold traded in a tight range yesterday, roughly between $1,312 and $1,317 an ounce. December gold futures managed to eke out a 40-cent gain on Tuesday, while spot gold gained $1.80 to close at $1,314.60.

December silver was down marginally, losing 1.3 cents. to $19.28. Spot silver added 9 cents to close at $19.31.

Precious metals ETFs were also mostly flat. The SPDR gold trust (GLD) gained less than a tenth of a percent, while the iShares silver trust (SLV) rose 0.2%. Miners didn’t do as well, with the VanEck gold miners ETF (CDX) losing a half-percent.

US Treasuries caught a bid yesterday, pulling yields down to their lowest in almost a week. Bond traders are seeing practically no chance of the Fed raising benchmark interest rates today.

Oil prices close mixed Tuesday, as a surprise draw-down in US crude stockpiles was reported by the American Petroleum Institute. This helped October WTI settle 14 cents higher at $43.44 a barrel. The October contract expired yesterday, being replaced by the November one. November WTI gained 19 cents to settle at $44.05. November Brent futures, however, logged a seven-cent loss to end at $45.88 a barrel. A Russian oil official tried to talk oil prices up while saying nothing much at all Tuesday. This led some oil traders to slip back into “hoping against hope” mode, with eyes toward next week’s oil symposium in Algiers.

Fed-talk-gold-downThe dollar gained modestly yesterday, on expectations (which turned out wrong) that anything the Bank of Japan announced today would be yen-negative. A stronger yen despite negative interest rates has stymied the Japanese central bank’s efforts to pull the country out of a persistent deflationary spiral. Dollar bulls now look to the Fed to issue a hawkish statement this afternoon, which will raise the dollar.


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