Gold Traders see thru ECB’s “Smoke and Mirrors”
On Feb 7th, the ECB kept its repo rate steady at 4.00%, but Trichet placed equal stress the downside risks to the Euro zone economy, on par with worries over inflation. “Uncertainty about the prospect for economic growth is unusually high and the risk surrounding the outlook for economic activity lies on the downside. Looking ahead, the slowdown in the economies of some of the euro area major trading partners is likely to have an impact on euro area real GDP growth in 2008,” he said.
Trichet’s comments about a slowdown in the Euro zone economy were viewed as a sign of capitulation, and that the ECB is open to cutting its interest rates for the first time in almost five years. The Gold market knows what nobody knows, and understands that lower ECB interest rates will further inflate the Euro M3 money supply. The yellow metal jumped to a record 630 euros/ oz, during Trichet’s press conference, and is up roughly 16% over the past three months.
Today's reaction in Gold to the ECB's decision to keep interest rates unchanged was a bit confounding. It was surmised by many, myself included, that should the ECB indeed cut rates today, there would have been a rush to the Dollar as the Euro reacted negatively to the rate cut..and thus Gold would fall. Many also surmised prior to the ECB rate announcement that should the ECB keep rates on hold but turn dovish on possible rate cuts going forward, the Dollar would catch a bid as the Euro fell...and thus Gold would fall. Going into this mornings proceedings then, most expected a hit in Gold. It never materialized. The Euro tanked, the Dollar rose, and strangely, Gold rose right along with it. Why?
The potential for inflation, roaring global inflation, that is why Gold rose today. Investors are slowing realizing the shortcomings of paper currencies, and the virtues of Gold. With Gold writing it's own script today, it was dificult to have the confidence to chase it. Sometimes when things don't go as planned it's a good idea to step aside and watch the proceedings. You never know what kind of traps dem Rat Bastids on the NY COMEX may be laying for Gold Bulls. Especially with the Asians on Holiday celebrating the Lunar New Year Thursday and Friday.
Both Gold and Silver have established support in this dip in price either at or near the congestion zones we pointed to earlier in the week. It may yet be a bit premature to give the all clear just yet. A retest of Gold support around 885 and Silver support around 16.25 remain a possibility. However, both may be working thru congestion here now, much as they did coming off the previous low on the way to new highs. A break higher from here may be considered a call for boarding passes.
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