GOLD PRICE NEWS - The gold price fell $4.93 to $1,198.64 Thursday morning as the euro currency continued its recent advance against the U.S. dollar. At just below $1,200 per ounce, the gold price extended its monthly decline to $45.01, or 3.6%, but remains higher by $103.31, or 9.4%, year-to-date. The SPDR Gold Trust (GLD), which acts as a proxy for the gold price, declined $0.47, or 0.4%, to $117.26 per share ahead of the open of U.S. equity markets.
As the gold price has traded inversely to the euro/U.S. dollar currency cross in recent months, this morning’s 0.4% climb to 1.2682 against the greenback pressured the price of gold. The euro continued its rebound against the dollar in spite of further dovish comments from the European Central Bank (ECB). At its latest meeting on monetary policy, the ECB left interest rates unchanged at 1%, consistent with market expectations. The ongoing sovereign debt crisis in Europe has caused ECB President Jean-Claude Trichet to back off his hawkish rhetoric and join the U.S. Fed, Bank of England, and Bank of Japan in engaging in quantitative easing.
Further pressuring the gold price was the weekly U.S. jobless claims data, which came in better than expected. Initial claims fell by 21,000 to 454,000 in the week ended July 3, below the 460,000 median estimate in a Bloomberg survey of 36 economists. This data is one of the few positive economic figures to emerge in recent months, as numerous other data points have suggested the U.S. economic recovery has sputtered.
One of the downside risks for the gold price is the unlikely scenario that central banks, notably the U.S. Federal Reserve, raise interest rates in advance of market expectations. Thomas Hoenig, Kansas City Federal Reserve Bank President, reiterated his view yesterday on Bloomberg TV that monetary policy should be normalized. “I am not saying raise rates to very high levels, I am saying get it off zero,” Hoenig emphasized. The most vocal hawk on the Fed, Hoenig stated, “I think we’ve done enough” to boost the economy. A higher fed funds rate, in combination with current tepid price inflation readings, would raise real interest rates - one of the chief drivers of the gold price. Negative real interest rates have been supportive of higher gold prices. A rate hike would increase the opportunity cost of holding a sterile asset such as gold, potentially pressuring the gold price and the rest of the commodity complex.
Despite the protestations of Hoenig, Chairman Bernanke, a vociferous dove, continues to control the majority on the Fed. The housing market faces a plethora of headwinds, unemployment is hovering near 10%, and access to consumer credit is poor. The litany of economic challenges facing the U.S. economy suggests that interest rate hikes are way off in the future. A near zero fed funds rate should continue to support the gold price, notwithstanding corrections, such as the current one, that test the resolve of even the most convicted gold price bulls.
