World Economy

Gold Near 4-Month High, Euro Stays on Edge

Gold Near 4-Month High, Euro Stays on EdgeGold Near 4-Month High, Euro Stays on Edge

Gold held close to a four-month high on Monday as uncertainty in global markets pushed investors towards the safe-haven metal, with holdings in the top bullion fund recording their biggest jump in nearly five years, while, the euro flirted with 11-year lows.

A market rout after Switzerland unexpectedly abandoned a cap on the franc last week triggered strong bids for gold, often seen as an alternative investment to risky assets, Reuters reported.

Holdings in SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, climbed 1.92 percent to 730.89 tons on Friday – the fund’s biggest daily percentage jump since May 2010.

Spot gold dipped 0.3 percent to $1,275.50 an ounce by 0740 GMT, but was still close to a four-month high of $1,281.50 reached on Friday. The metal gained nearly 5 percent last week – its best week since August 2013.

Liquidity was set to be thin on Monday with the US markets closed for a holiday. But trading volatility is likely to increase through the week with major data and central bank policy meets on schedule.

Chart indicators for gold are also bullish. Gold is expected to test a resistance at $1,286, with a good chance of breaking above this level and rising more to $1,300, said Reuters technical analyst Wang Tao.

  Euro on Edge

The euro flirted with 11-year lows on Monday as investors braced for the European Central Bank to take its boldest steps yet to combat deflation and revive the eurozone economy.

The common currency last traded at $1.1557, not far from a trough of $1.14595 hit on Friday. Against the yen, it fetched 135.17, near a three-month low of 134.70.

That the ECB will launch a large-scale sovereign bond-buying program at its Jan. 22 meeting is no longer in question, but what is unknown is how the plan will be designed and whether it will be seen as credible and sufficient.

“There will no doubt be a lot of wire traffic after Thursday’s meeting about these details and such structural shortcomings, but the total QE to be announced will get prime attention,” said David de Garis, senior economist at National Australia Bank, adding the market was now looking for quantitative easing of 1 trillion euros.

The euro struggled near a four-month low against the Australian dollar and a record low against the New Zealand currency.

Against the Canadian dollar, the euro remained within near a 16-month low of C$1.3749 set on Friday.

Pressure on the euro intensified last week after the Swiss National Bank shocked markets by abandoning its three-year-old currency cap, effectively removing a pillar of support for the euro.

The SNB had been buying billions of euros in order to keep the franc from strengthening above the 1.20 per euro cap it had implemented back in September 2011.

  Governance Broken

The actions that the European Central Bank will finally announce this week won’t give the continent the boost it needs. That’s for several reasons, but the main one hasn’t changed: The European Union’s system of economic governance is broken. What’s remarkable is that Europe’s governments haven’t even begun to confront this larger issue.

After months of slowly escalating hints, understandings, analyses and preparations – with inflation trending down all the while, most recently to less than zero – ECB President Mario Draghi has no choice but to reveal some kind of quantitative easing program this week. The policy has been widely anticipated and priced into markets. If the central bank does nothing, reactions will be ugly.

Something pretty substantial will be needed just to avoid that. Yet precisely because a moderately sized QE program is expected – of, say, 500 billion euros – its arrival won’t have much further effect. To deliver the necessary stimulus, the ECB needs to surprise financial markets with a bigger-than-expected announcement.