Currency Market Intervention Can Support Gold

Kitco News – Central bank intervention into currency markets can be supportive to gold prices, said a director at a metals consultancy firm.

Neil Meader, research director at Thomson Reuters GFMS, said gold can benefit from intervention because investors may decide to leave a market that is being managed, rather than one which is allowed to trade according to market forces. 

On Thursday, the European Central Bank said it will lend U.S. dollars to euro-area banks to make sure they are supplied with enough greenbacks through the rest of 2011, according to several news reports. The ECB said it will coordinate with the Federal Reserve and other central banks to conduct three U.S. dollar liquidity-providing operations with a maturity of three months and will do so in October, November and December.

The move comes as there are worries about European sovereign debt and bank-funding costs. Gold dropped on the news, but it was already weaker on Thursday as risk appetite returned to financial markets following Wednesday’s announcement by European policy makers to keep Greece in the European Monetary Union.

Meader gave the example of the recent move by the Swiss National Bank to keep a peg to the euro after the Swiss franc rose sharply as investors sought a safe haven. When the bank said it would intervene, the “Swissie,” as it is known, fell sharply.

“As soon as it was apparent it would be managed, a lot of fund managers quit the franc,” he said. The currency’s role as a safe haven dimmed, which gave gold’s safe haven status a brighter shine.

THOMSON REUTERS GFMS SEES HIGHER GOLD PRICES BY YEAR’S END

In its Gold Survey 2011 Update 1, which was released Thursday, the firm said it sees $2,000 an ounce gold by year’s end, but not before a soft patch in prices is experienced. Meader said the firm came about this view when prices were closer to $1,900.

“At the time gold had been bouncing around $1,900 intraday and we thought, are we going to see in September an average price of $1,880? Probably not,” he said.
At 11 a.m. EDT, spot gold prices were trading around $1,774.

Because investment demand has been driving gold prices higher lately, and since this type of buyer tends to move in and out of markets more often than a “buy and hold” owner, gold prices could be subject to breaks if the news isn’t giving people a reason to buy.

Meader said in the current market structure gold needs to have a continuous supply of price-supportive news and if something occurs, like the recent rebound in the U.S. dollar, then investors will head for the exits.  He also added that given how swiftly gold prices have risen since August there is a sense that values rose too far, too fast and it could be healthy for a time of consolidation.

Like many in the gold market, Meader said price weakness in the metal could be short-lived as demand at lower levels has enticed physical buying, especially from Asia. There is strong buying under $1,800 which limits how much time gold spends at that level. Bar investment is popular in China and India, while exchange-traded fund buying is more popular in Western countries.

By Debbie Carlson of Kitco News dcarlson@kitco.com

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