Last Updated : 06 December 2012 at 18:05 IST
The ECB or European Central Bank is expected to announce interest rates in a while. Apart from the question if interest rates would be brought down or not, there is also the interesting question of relationship between gold prices and interest rates.
Analysts, say chances are less that European Central Bank would cut interest rates for two reasons: one is that interest rates are already at record lows and cutting interest rates further may not make a cut in the markets. None of them see the bank cutting its key refi rate below its current level of 0.75 per cent
"The ECB is highly unlikely to cut interest rates. It has explained before that it thinks such a cut would have no impact on the economy as the transmission mechanism remains impaired," said Marie Diron at Ernst & Young Eurozone Forecast to AFP.
“I do not expect an interest rate cut by the ECB, as bringing down the interest rates may not be of much use. Lowering the interest rates would not make anyone go to a bank and demand more of loans, so that he can go out and start a business. It is simply a lack of confidence ruling the markets and fiscal measures like increasing the government spending could show a way out. But this is also not possible under current circumstances.” said Martin Patrick, an economist from India.
So how would gold be impacted if ECB cuts the interest rates, just in case.
If ECB cuts the interest rates, then that can increase the money supply in the economy weakening Euro and strengthening Dollar. This means gold prices would weaken further as gold and dollar are inversely related. But, what eventually happens is that investors would invest the profits they booked in Dollar trade in low-hanging gold.
That means gold prices would climb further from the lows. Simple!
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