Gold prices are higher on Monday although currently quoted well off the highs of the session. This could be a huge week for the yellow metal as market participants will get policy decisions from the European Central Bank as well as the Fed. It is widely expected that the ECB will be forced to take action to attempt to stop the Euro zone from slipping back into recession if it has not already. A rate cut is quite likely.
The fact that cuts are necessary again just goes to show how difficult things have become in the Euro zone and that the fight to stabilize the union is far from over. The fed here in the U.S. is likely to hold the line on rates. According to the Fed’s favorite inflation indicator, the PCE (Personal consumption expenditures) the current rate of inflation is decreasing and is well below the fed’s target rate of 2%.
What does this mean? It would seem to indicate that there is no pressing reason for the fed to act right now. Inflationary pressures have always been a risk and a well documented concern with regards to the fed’s bond buying programs. The fact is however, with no inflation in sight the fed is free to continue its asset purchases-and may now actually extend those asset purchases.
It was not long ago that investors were weighing the likelihood of the fed removing the punchbowl, and many thought the party may be over sooner rather than later. Well given recent data that certainly does not appear to be the case. In fact, deflation is now becoming more of a concern, and the fed may be forced to keep the printing presses rolling for longer than expected in order to fight a slowdown.
This is likely to keep a bid under risk assets such as stocks and some commodities. How it will affect gold prices is harder to say. The U.S. dollar index will be closely watched after the fed decision. As discussed before, weakness in the greenback could unlock one of the keys to the gold market moving sharply higher from here. Should the fed indicate that the money will continue to flow, it could set off some weakness in the dollar. This weakness could fuel a rally in bullion.
Demand for physical gold continues to be very strong and in our opinion we do not see this changing regardless of what central bank action is or is not taken this week.
