The gold rollercoaster looks set to continue as central banks hint at policy changes and leave traders second-guessing. The US Federal Reserve are talking about increasing interest rates earlier than expected and the European Central Bank (ECB) are contemplating quantitative easing (QE).
US job data published on Friday was slightly below Wall Street speculations and raised fears that the US economy is not growing as quickly as expected. Once the figures were made public gold rallied more than one percent as bullion investors ceased on the opportunity to make profits on short coverings.
Now the dust has settled, precious metals continued to decline. Analysts are now predicting the Fed will tighten their monetary policy and could delay their plans to increase interest rates in early 2015.
Central bank policies
Economic data will be the greatest influence on gold prices for the short-term, but central bank policies will have an impact over the long-term, and the conflicting position of US and Europe may play one off against the other.
Although US job data was disappointing on Friday, stats produced in manufacturing and factories earlier in the week were more positive. Even, the non-farm payroll figures, classed as the yard-stick on which the US economy is measured was not that bad.
Wall Street analysts has predicted 195,000 new jobs to be added in March and employers delivered 192,000. The shortfall may suggest a slow-down, but the figures still show support for a growing US economy. An emerging economy will push gold prices down.
QE in Eurozone?
Meanwhile ECB President, Mario Drahgi has announced policymakers may have to introduce QE in order to boost inflation. Asset purchasing will involve attempting to fuel the economy by injecting electronic cash into the system.
Although the ECB has not confirmed they will take measures to stimulate the economy, analysts in the central banks have produced models to illustrate how QE will give interest rates a lift and prevent a Japanese-style hyper-deflation.
At present however, the introduction of QE is being considered by some analysts as no more than a threat, although given an ECB spokesman declined to answer questions on QE, analysts assume the bond-buying process will start sooner rather than later.
What will happen to gold prices?
With Europe’s biggest economies showing significant improvements since last Spring, the need for QE in the Eurozone is being called into question. One analysts described the proposed injection of €1 trillion as “awfully expensive,” whilst Bundesbank described ECB plans as a “narrow mandate.”
The introduction of a bond-buying program in the Eurozone will mean a drop in value for the Euro whereby traders will turn to the safe haven of precious metals and push gold prices back up.
Technical indicators show the Eurozone economy is recovering of its own accord, and there is no real need for ECB policymakers to intervene? If this is to be the case investors can expect to see further price falls for precious metals making this an ideal time to add gold and silver to your investment portfolio.