Gold Waits as ECB Meeting Approaches

September 5, 2012 at 07:10

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Gold inched lower on Wednesday, pulling back from a near six-month high in the previous session after weak U.S. data reinforced speculation of imminent stimulus action, as investors await a key meeting of the European Central Bank this week.

U.S. manufacturing activities shrank at their sharpest clip in more than three years last month, feeding hopes the Federal Reserve could act soon to shore up the frail economy.

As the weak data reinforced expectations for another round of QE by the Fed, the ECB is under increasing pressure to cut excess borrowing costs ahead of a policy setting meeting on Thursday.

Investors may adopt a cautious approach before the meeting, and the all-important U.S. non-farm payrolls data due on Friday, analysts said.

“It is a little too early to go full throttle,” said Dominic Schnider, an analyst at UBS Wealth Management in Singapore.

“Will QE really come? Policymakers are heating things up, but will what eventually comes out be as big as the market is looking for?”

Gold’s fortune this year has largely been tied to the Fed’s attitude towards another round of quantitative easing, which if it materialises, could further boost gold’s appeal to investors seeking a hedge against inflation down the road caused by rampant cash printing.

Encouraged by Fed Chairman Ben Bernanke’s comment last week on the grave conditions of the U.S. labour market which kept the door wide open for more stimulus measures, spot gold advanced to $1,698.45 on Tuesday, its highest level in nearly six months.

Technical analysis echoed the sentiment. Spot gold has aborted a bullish target at $1,711 an ounce, as the resistance near $1,700 proved strong, said market analyst Wang Tao.

A slightly stronger dollar also weighed on gold.

Holdings of gold-backed exchange-traded funds rose to a record high of 71.889 million ounces (2,038 tonnes) by September 4. SPDR Gold Trust, the biggest gold ETF, reported its holdings rose to 1,293.138 tonnes, the loftiest level since mid-March.

Silver ETF holdings stood at 501.503 million ounces, easing from 504.431 million hit in late August, the highest level since May 2011.

”Although physical silver demand remains sluggish, the sentiment is bullish after prices broke above the 200-day moving average convincingly,” said a Shanghai-based trader, adding that investors may hold off on action until Friday’s U.S. employment data.

The Relative Strength Index readings on spot gold and silver remained above 70, suggesting they were still in overbought territory.