Gold Price Reacts To ECB Interest Rate Policy

Gold jumped 1% on Thursday, moving further from this week’s four-month low; this was following the European Central Bank’s bold decision to cut interest rates to record lows (deposit rate to -0.10%, refinance rate to 0.15 %). Expectations for a rate cut had risen in the wake of weak economic data from the euro zone, including reports of lethargic activity in the manufacturing sector and deteriorating conditions in the labor market.

This is the first time a large central bank announces negative interest rates. President Mario Draghi also unveiled a package of new stimulus measures arriving in the euro area, similar to the Fed’s quantitative easing programme.

EU gold market strongly affected

What stands out as really good news is that the gold market is now reacting to financial news in a strong and healthy manner. In addition, the myth that Europeans are no longer attracted by gold has been shattered, together with the impression that most Europeans cannot afford to save or invest in anything.

For instance, right after the ECB announcements, BBC news announced the results of an EU Department of Finance survey showing that Germans save on average more than 10% of their monthly income, which is marginally higher than what the British and the French save. Keeping savings is a long-standing tradition in Northern Europe, and the economic crisis is less evident (if at all) in these countries.

In reality, Germany faces no crisis whatsoever, having steady economic growth, low unemployment, almost zero inflation, and a sturdy banking system. The German middle class’s high standard of living, together with the people’s cautious spending and habit of saving (the golden rule for financial prosperity) gives them great investment potential.

The fact, however, that interest rates are falling by no means indicates that Europeans are likely to decidedly empty their savings accounts and immediately seek alternative options. Interest rates have been moving close to zero in the Eurozone many years now.

Gold price short term reaction

As the gold market is finally regaining its wide-awake status, there is some room for technical analysis, at least for the near term.

Gold tends to benefit from low interest rates and failing monetary policy; this probably gives it a momentum towards $1,270 per ounce where strong resistance is met, so it is unlikely that any rally will be sustained. Additionally, gold is now more expensive for Europeans, as the Euro fell against the US dollar after ECB measures were announced, although this is again a short term reaction.

Analysts have attributed recent strength in gold prices to expectations that the Fed and the ECB will continue their easy-monetary policies, as well as to stronger demand for physical gold as such policies tend to raise the risk of inflation.

For the savvy investor, this is time for action: monitor the market closely, keep updated with the world’s financial news, and any developments that can have affect your gold investment or the diversification of your investment portfolio.

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