Gold News

Price to Buy Gold Rebounds Ahead of 'Hard Hike' Fed as ECB Tweaks QE Exit to Help Italy

BUY GOLD prices rose ahead of Wednesday's US Fed decision on interest rates, reducing this week's earlier slump as Western government bond prices jump, pulling yields sharply lower from yesterday's multi-year and decade highs on a change in QE policy from the European Central Bank aimed at easing the crisis in Italy's borrowing costs.
Global stock markets also rallied, rising for the first time in 7 sessions.
The ECB vowed last week to end new QE money creation and bond buying from 1 July before raising its key short-term deposit rate from minus 0.5%.
Calling at "ad hoc" meeting this morning, the Governing Council then said today that it will "apply flexibility" in how it re-invests money from maturing bonds in its existing €8.8 trillion ($9.2trn) portfolio – a move widely seen (and recommended) as trying to address the plunge in Italy's sovereign bond prices.
With bond markets worldwide seeing prices slump as inflation and now central-bank interest rates jump, that has driven borrowing costs for Rome – currently with a sovereign debt-to-GDP ratio of 150%, plus an annual government deficit worse than 5% of GDP – up to levels not seen since the post-global financial crash Euro debt crisis of 2010-2013.
ECB holdings of Euro-member sovereign bonds. Source: Scope Ratings
"Given Italy’s (BBB+/Stable) public finance vulnerabilities," said a note from Alvise Lennkh-Yunus at the  Scope Ratings consultancy this morning, "markets [have been] rapidly repricing risks on Italian government bonds in the absence of full assurance around the ECB’s commitment to contain rates and/or spreads.
"Italy’s reliance on the private sector [for new finance] is set to rise over the coming years as the government’s funding needs will remain elevated while the ECB winds down net asset purchases.
"This transition, which contrasts with the 2019-21 period, has important implications and needs to be managed carefully" – perhaps by the ECB ignoring its "self-imposed limit" of not holding more than 33% of any member state's outstanding bond issue.
Prices to buy gold with Euros on Wednesday halved this week's earlier 3% plunge from 1-month highs, trading back near €1760 per ounce after the ECB's comment.
Investors wanting to buy gold with Dollars meanwhile saw the price rally above $1835, more than $30 above last night's new 4-week low.
Betting on today's Fed decision now puts a 98.6% certainty on a hike of 75 basis points – the first such hike since 1994 – with betting on a smaller rise evaporating entirely as the remaining 1.4% of trader positions banks on a full 1 percent hike.
July will then see another 3/4-point hike according to 96.6% of current bets, with September bringing a third such rise in the view of 64.7% of positions.
The remaining 35.3% sees Fed interest rates set higher still 3 months from now, with a handful of traders betting on Fed rates having a ceiling of 3.5% after the September meeting.
Ahead of the Fed, US Treasury bond prices still rallied on Wednesday alongside Euro and other Western sovereign debt, pulling 10-year US yields down almost 1/10th of a percentage point from last night's fresh 11-year high of 3.49% per annum.
Germany's 10-year rate fell 12 basis points to 1.62% and Italy's eased by 34bps to 3.82%.
UK Pound prices to buy gold in Sterling meantime reclaimed last weekend's closing level at £1519 per ounce – the highest Friday finish since start-May – as 10-year Gilt yields retreated by 16bps after hitting the highest since mid-2014 above 2.60%.
"Since the gradual process of policy normalisation was initiated in December 2021," said today's statement from the ECB – now holding deposit interest rates below zero for more than 8 years running – "the Governing Council has pledged to act against resurgent fragmentation risks.
"The pandemic has left lasting vulnerabilities in the Euro area economy...[against which] the Governing Council [will] mandate the relevant Eurosystem accelerate the completion of the design of a new anti-fragmentation instrument."
Over in Tokyo, the Bank of Japan meantime raised its new QE bond buying for a third day running, going from Monday's promised spend of $3.7bn to yesterday's $18.2bn and now "unlimited" starting from Thursday, all targeted at capping the yield on 10-year Japanese government bonds below 0.25%.


Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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