(David Levenstein) Interestingly, while softer oil prices have usually had a negative impact on gold prices, as it hurt gold’s appeal as a hedge against oil-led inflation, the price of gold has remained firm even though the price of crude oil has slumped to fresh five year lows.
Gold prices have been on an incredible roller-coaster ride over the past couple months, whipsawing like crazy. And contrary to popular main stream propaganda, the price volatility has had had absolutely nothing to do with fundamentals. Prices have been driven down by speculators on Comex who have been able to use huge short positions to short gold futures.
While the downside of their action is creating a distorted and unrealistic price for gold, the lower price is creating a wonderful opportunity to buy.
The prices of Brent crude and West Texas Intermediate have plummeted over the last few months.
Both Brent and WTI tumbled 18% in November as the Organization of Petroleum Exporting Countries decided to maintain its 30 million-barrel-a-day output target. Crude has traded in a bear market since October amid the fastest pace of U.S. production in three decades, rising output from OPEC and signs of weakening global demand.
OPEC, responsible for about 40% of the world’s oil supply, pumped 30.6 million barrels a day in November, above the 30 million target for a sixth month, according to data compiled by Bloomberg
Last Thursday, the price of gold came under some selling pressure once again, when the European Central Bank (ECB) said it wouldn’t consider adding to bullion purchases. However, the price of the yellow metal pared earlier losses as the euro rebounded against the dollar after the ECB chief Mario Draghi said the bank would re-evaluate the case for more monetary stimulus next year.
The ECB announced that it will maintain interest rates at current levels. The central bank cut its 2014 growth forecast for the Eurozone to 0.8% from the 0.9% it was predicting three months ago. The downgrades were sharper for 2015 and 2016. Growth next year is expected to be 1%, down from the earlier forecast of 1.6%, while the 2016 forecast was cut to 1.5% from 1.9%.
The ECB also lowered its inflation target following steep falls in the oil price with the annual rate expected to be just 1.6% even in 2016, still below its target of close to but below 2%. Eurozone inflation is currently just 0.3%.
In the press conference after the announcement, Draghi confirmed that the central bank will not buy gold as part of its asset-backed purchase program. When asked what types of assets the governing council would buy as part of its quantitative easing program, he said that the central bank will consider a package of broad-based asset purchases including sovereign debt but not gold. “We discussed all assets but gold,” he said.
Draghi also emphasized that more time is needed to gauge the effect of prior stimulus and the need for additional easing. He noted that ECB will reassess the policies early next year and “it doesn’t mean at the next meeting”.
In simple terms this means that the ECB will willingly buy toxic assets including Greek bank CDOs, Italian bonds—despite the fact that the EU’s fourth largest economy, was downgraded to just a single notch above junk by S&P on Friday, Spanish condo HELOCs, and Portuguese Used-Car ABS… but absolutely not gold. This is in sharp contrast to what the Chinese and Russians are doing which is buying massive amounts of physical gold.