Gold tracks oil higher as market eyes Fed

MNB

Gold climbed in Europe on Monday as rising oil prices fuelled buying of bullion as an inflation hedge.

Gains were capped, however, by a firmer dollar in the wake of soft European economic data. Gold rose to $903.65/904.65 an ounce at 0957 GMT, from $901.35/902.75 late in New York on Friday. Oil tracked higher over the weekend as traders speculated a promised output hike from Saudi Arabia would fail to outweigh falling production from Nigeria, and amid geopolitical tensions. “We expect high oil prices will bring higher investment into gold,” said Commerzbank analyst Eugen Weinberg. “The inflationary pressures we are seeing around the world will keep pushing investors into gold, because gold is seen as a safe haven against inflation.”

Gold’s resilience after pushing above $900 an ounce last Thursday is also positive from a technical point of view, he added. On the fundamental front, news that Australian gold production has fallen by a greater-than-expected 7% in the last year is also encouraging buying, analysts said.

Australia is the world’s third-largest producer of gold behind China and South Africa. Its output is estimated at 231 tons in the year to June 30, against 249 tons the year before. “This kind of news will also bring interest back to gold,” said Weinberg at Commerzbank.

John Meyer, an analyst at Fairfax IS, said gold production was becoming less cost-effective for miners, who can produce other metals with lower overheads. “Margins for gold producers are below that for other types of mines effectively diverting capital into other metals,” he said in a research note. However, gains in the gold price were capped by a rally in the dollar, which ticked up against the euro after weak European economic data.

The euro zone services PMI fell to 49.5 in June while the manufacturing PMI stood at 49.1 -- both below the 50 reading which signals economic expansion. The German Ifo business climate index also fell more than expected in June, to 101.3, its lowest level since December 2005. Short-covering ahead of this week’s Federal Reserve decision on interest rates also benefited the dollar, analysts said. A softer dollar typically benefits gold, as it is bought as a hedge against weakness in the US currency. A weaker greenback also makes dollar-priced gold cheaper for holders of other currencies.

The Fed’s Open Market Committee is holding a two-day meeting to set rates from Tuesday. The FOMC is widely expected to leave rates on hold at 2%, but is seen sharpening its rhetoric on inflation in its accompanying statement.  Its decision, and its post-decision statement, are expected to have a significant impact on the dollar, and therefore on gold. Any suggestion that a rate hike may be forthcoming later this year could help the currency. (Reuters)

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