Gold Falls as Rally in Dollar Dents Investor Demand

Gold prices dropped almost 1.3 percent on Friday as the dollar rose and the air drifted out of the market’s enthusiasm for the ECB stimulus to pump about one trillion euros into the euro zone’s flagging economy.

The yellow metal, widely viewed as an inflation hedge, advanced more than 1 percent on Thursday to cross the $1,300 mark for the first time since August after the ECB said it would purchase sovereign debt from this March until the end of September 2016.

ECB President Mario Draghi promised to release 60 billion euros worth of assets per month into the economy, more than markets had been hoping for, in a program that will last through September next year and will include government bonds, debt securities issued by European institutions and private-sector bonds. The ECB’s €1.1tn QE programme is considered the last remaining major policy option for stimulating eurozone economy and counter the threat of a deflationary spiral.

The ECB “decided to launch an expanded asset-program encompassing the existing purchase programs of ABS and covered bonds,” Draghi told reporters in Frankfurt. “We see sustained adjustment in the path of inflation which is consistent with our aim of achieving our aim of inflation rates close to but below 2 percent.”

Gold is among the best-performing commodities this year, as investors across the globe adopted cautious approach amid volatility in stocks and currency markets, increasing safe-haven demand for gold.

But with the euro sinking to lowest against greenback since September 2003, gold prices gave back some of those gains as market is evaluating the impact of the stronger U.S. currency, which makes dollar-denominated assets more expensive to foreign investors, thereby decreasing the demand for the commodities.

“Gold was completely dislocated from the dollar yesterday, meaning that euro-gold is the best performing commodity this year, helping dollar gold stay fairly stable around $1,300,” Saxo Bank’s Ole Hansen said.

“But that strength in the dollar is now proving too much.”

Gold for February delivery dropped $8.10 or 0.6% to settle at $1,292.60 a troy ounce on Friday as some investors locked in profits ahead of the weekend. Bullion reached $1,306.20 on Thursday, its best level since Aug. 15, and closed up 1.2% on the week to mark a third straight weekly gain.

The dollar grew as much as 1.4 percent against a basket of six other major currencies, mainly led by euro weakness, while European markets scored their best two-week advance in five years.

Euro-priced gold was at 1,167.60 euros an ounce, reaching its highest since April 2013.

“Gold held in non-U.S. dollars has been a very good place to be over the past 12 months,” said Michael Shaoul, chief executive at Marketfield Asset Management in New York.

Goldman Sachs Group on Friday increased its 2015 gold price forecast to $1,262 per ounce from $1,200, saying the decline in bullion since mid-2013 has been significantly lower from its expectations.

The bank said gold prices will go up in the near term due to weaker-than-expected U.S. economic data, the larger than expected measures by the European Central Bank and the surprised move by the Swiss National Bank to abandon its three-year-old cap on the franc versus the euro.

However, the bank expect lower gold prices in the longer term citing factors including expectations of lower inflation, weak energy prices having a deflationary effect on gold’s mining marginal cost and a rising U.S. currency.

Gold prices are likely to resume declining in the third quarter, in line with the launch of the expected Fed rate hike.

Goldman reduced its 2016 gold price forecast to $1,089 per ounce from $1,200.

Gold traders now turn their sights to Sunday’s election in Greece and next week’s Federal Open Market Committee policy meeting for clues on when tapering of the Federal Reserve’s QE could begin. Both events are likely to offer a more clear picture of the wider economic environment.

Investors may have to rethink about the timing of an interest rate increase by the Fed following the ECB’s landmark sovereign bond-buy plan, Janney Montgomery Scott’s chief investment strategist told CNBC on Thursday.

“I think there’s a nontrivial chance that this helps to delay the Federal Reserve’s liftoff date with regards to interest rates if the dollar continues to strengthen,” Mark Luschini said in a “Squawk on the Street” interview.

“People are coming to the conclusion that while the ECB is getting more expansionary, the Fed may be forced to be less restrictive because of the headwinds to inflation from the drop in oil prices, which can trigger some delay in interest rate hikes and would be positive for gold,” Julius Baer analyst Carsten Menke said.

On the contrary, some market observers think ECB’s QE won’t prompt the Federal Reserve to back off plans to raise interest rates in 2015.

“I do not think it will,” says Nick Colas, chief market strategist at Convergex, a New York-based brokerage. “They are trying to march to the beat of a different drummer. For them it is about getting monetary policy back to normal.”

Among other precious metals, spot silver, palladium and platinum all saw declines.

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