Gold Price Turns Higher as ECB Unexpectedly Cuts Rates

GOLD PRICE NEWS – The gold price rallied $19.27 to $1,757.79 per ounce Thursday morning after the European Central Bank (ECB) unexpectedly cut its benchmark interest rate by 25 basis points to 1.25%.  The price of gold traded modestly lower near $1,725 in overnight trading, but turned sharply higher as ECB President Mario Draghi – who took over for Jean-Claude Trichet earlier this week – wasted little time in providing a clear signal on the severity of the European sovereign debt crisis.

Silver jumped higher in concert with the gold price, toward $34.90 per ounce, alongside cyclical commodities.  European markets extended their gains following the ECB rate cut, as did U.S. equity market futures.  The euro currency, which rebounded from an overnight low of 1.3652 to 1.3832 against the U.S. dollar, slid back toward 1.3760 following the interest rate announcement.

On Wednesday the gold price climbed $15.75, or 0.9%, to $1,735.53 per ounce as the Federal Reserve reiterated its commitment to accommodative monetary policies for the foreseeable future.  Silver advanced in concert with the price of gold, by $0.73, or 2.2%, to $34.16 per ounce.  Strength in gold and silver prices was fueled by a modest sell-off in the U.S. dollar, which lost 0.3% against a basket of the world’s leading currencies.

Shares of precious metals companies posted strong gains alongside the price of gold and the broader equity markets.  The Philadelphia Gold & Silver Index (XAU) jumped 2.2% to 203.81, while the S&P 500 Index added 1.6% to 1,237.90.  Among gold producers, Goldcorp (GG) and Harmony Gold (HMY) were two of the top performers, with each surging 3.4%.  As for silver stocks, Pan American Silver (PAAS) rose 2.9% and Silver Wheaton (SLW) added 2.5%.

The gold price rallied ahead of yesterday’s Federal Open Market Committee (FOMC) meeting and maintained the majority of its gains following the FOMC announcement.  There, the U.S. central bank reaffirmed its plans to leave the Fed funds rate near zero through mid-2013 and to proceed with Operation Twist.  The Fed noted that “recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated,” to help support its accommodative policies.

While the majority of the FOMC statement was quite similar to the prior one in September, one key difference was a dissenting vote from Chicago Fed President Charles Evans.  Evans supported further monetary policy easing – which marked the Fed’s first “dovish dissent” in five years, according to BTIG chief global strategist Dan Greenhaus.

In addition to Evans’ dissent, another key difference was the absence of dissenting votes from Presidents Plosser, Fisher, and Kocherlakota.  At the previous two FOMC meetings, these three central bankers each voted against Fed committing to its interest rate policy through mid-2013 and to implementing Operation Twist.

Although the Fed did not launch a third round of quantitative easing (QE3) – as some economists were predicting –the FOMC’s tone was more dovish than expected.  Evans’ dissent, coupled with the lack of hawkishness from the other Presidents, helped signal that the Fed is “clearly inching towards easing further,” Greenhaus asserted in a note to clients.

While Greenhaus did not discuss the implications of further easing for the gold price, history suggests that they would be particularly positive for the yellow metal.  At the post-FOMC press conference, Chairman Bernanke once again noted that inflationary risks remain low, while the deflationary impact of high unemployment and weak real estate markets continues to be a significant drag on the economy.  So long as deflation remains the Fed’s chief threat, the gold price is likely to remain well supported.