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Gold falls sharply, as investors brace for central bank divergence

Published 03/11/2016, 12:54 PM
Updated 03/11/2016, 01:06 PM
Gold fell by more than $12 an ounce on Friday, but still closed the week above $1,260

Investing.com -- Gold fell from near 13-month highs on Friday, amid heavy profit taking, as investors brace for potential divergence among major central banks, after the European Central Bank used nearly all of the tools at its disposal at a closely-watched meeting to stimulate flagging growth throughout the euro zone.

On the Comex division of the New York Mercantile Exchange, gold for April delivery traded in a broad range between $1,255.50 and $1,283.70 an ounce before settling at $1,260.30, down 12.50 or 0.98% on the session. On a volatile week of trading, gold closed virtually flat. Despite the considerable losses on Friday, gold is still up by more than 17% since the start of the new year. The precious metal remains on pace for one of its strongest opening quarters in 30 years.

Gold likely gained support at $1,063.20, the low from January 4 and was met with resistance at $1,284.70, the high from Feb. 3, 2015.

The sharp sell-off came one day after the ECB's Governing Council approved a wide range of easing measures at Thursday's meeting in a last-ditched attempt to stave off threats of deflation and bolster investor sentiment. The ECB lowered its marginal lending rate by 0.05 to 0.25% and cut its main refinance rate by 0.05% to a new record-low of zero. The Governing Council also pushed its deposit rate deeper into negative territory, by cutting it 0.1 to Minus-0.4%.

At the same time, the central bank increased the size of monthly purchases with its bond-buying program by €20 billion to €80 billion a month and extended the program by several months through March, 2017. The ECB launched the comprehensive Quantitative Easing program last March in order to increase the amount of money supply available for banks to lend money to businesses and individuals.

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In addition, the ECB introduced a new series of Long Term Refinancing Operations (LTROs) on Thursday and announced that it will be purchasing non-financial corporate debt issued by companies established in the euro zone. Gold fluctuated wildly in Thursday's session, falling more than $10 an ounce following the ECB's monetary policy statement. The yellow metal then rallied sharply after ECB president Mario Draghi noted in a press conference that he does not see any need to lower rates any further if economic conditions stabilize.

Investors turn their attention to an interest rate decision by the Federal Reserve next Wednesday, following the completion of the Federal Open Market Committee's (FOMC) two-day March meeting. While the FOMC is widely expected to leave its benchmark Federal Funds Rates unchanged, the U.S. central bank could provide guidance on its pace of tightening over the next several months. In December, the FOMC abandoned a seven-year zero interest rate policy.

Any rate hikes by the Fed this year are viewed as bearish for gold, which struggles to compete with high-yield bearing assets in rising rate environments.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, was relatively flat in U.S. afternoon trading at 96.14, down 0.05% on the session. The index, which is down more than 2% over the last two months, fell to fresh three-and-a-half-week lows on Thursday.

Dollar-denominated commodities such as gold become more expensive for foreign purchasers when the dollar appreciates.

Elsewhere, the Shanghai Composite Index inched up 5.58 or 0.20% to 2,810.31, but still closed lower for the week by roughly 2.5%. On Friday, the People's Bank of China injected 20 billion yuan ($3.1 million) into the economy through reverse repo purchases, boosting its total to 85 billion on the week.

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China is the world's largest producer of gold and the world's second-largest consumer behind India.

Silver for March delivery added 0.099 or 0.64% to 15.645 an ounce.

Copper for March delivery gained 0.021 or 0.95% to 2.241 a pound.

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