247Bull.com Editor: In order to prevent the onset of a deflationary depression policymakers in the Eurozone and elsewhere will use every tool in there toolbox. Negative rates on commercial bank deposits are one such tool. Another is to purchase equities to support financial markets and revive the so-called wealth effect, and a recent survey by the Royal Bank of Scotland found that 23% of central banks already own shares and plan to buy more. Thanks to ZIRP, it is not just retail investors that are being forced to invest in higher risk assets. Central banks are now allocating their reserves into non-traditional assets such as currencies, emerging debt and equities.
Wholesale gold prices hovered around $1480 an ounce most of Friday morning, around 1% up on the week, as European stock markets edged higher and the Euro regained some ground against the Dollar ahead of the release of key US jobs data for April, including the latest nonfarm payrolls report.
Silver held its ground above $24 an ounce, also slightly up on the week, while other commodities also ticked higher. US Treasuries were little changed while UK Gilt prices fell.
“Precious metals remain rangebound,” says Standard Bank commodities strategist Walter de Wet.
“The $1450 level continues to attract physical gold buying.”
At its meeting on Thursday, the European Central Bank cut its main policy rate to an all-time low of 0.5%.
Asked at the subsequent press conference whether the ECB sees room to cut the rate it pays on commercial bank deposits with the central bank, currently at zero, ECB president Mario Draghi replied that his institution is “technically ready” for such a move.
“There are several unintended consequences that may stem from this measure,” Darghi added.
“We will address and cope with these consequences if we decide to act. We will look at this with an open mind and we stand ready to act if needed.”
“Draghi has shifted the ECB’s stance on the potential floor for interest rates,” says Marchel Alexandrovich, senior European economist at Jefferies International in London.
“A negative deposit rate is now a more distinct possibility.”
The Euro fell nearly two cents against the Dollar immediately following Draghi’s comments, though by Friday lunchtime had regained around half the drop.
Gold by contrast rose against the Dollar following Draghi’s press conference.
“We suspect that this was because the [Euro's]weakness was triggered…by the fact that Draghi’s comments, which while bearish on the Euro, were, curiously, a tacit endorsement for gold,” says a note from INTL FCStone metals analyst Ed Meir.
“[Negative deposit rates]would mean that under such a scenario, gold would no longer return nothing (if its prices held steady), but would, in fact, compare favorably to risk-free bank deposits whose holders would not even get their full principle back. We may reading too much into Draghi’s comments, but we see little else to explain Thursday’s disconnect between the weaker Euro and higher gold prices.”
The European Commission meantime cut its 2013 growth forecast for the 17-nation Eurozone Friday, predicting a contraction of 0.4%, down from a -0.3% contraction projected back in February. The economy of the Eurozone as a whole shrank by 0.6% during 2012, according to official GDP figures.
The Eurozone’s unemployment rate rose to 12.1% last month, figures released earlier this week show, the highest rate since the single currency launched in 1999.
“In view of the protracted recession, we must do whatever it takes to overcome the unemployment crisis in Europe,” the European Union’s Economic and Monetary Affairs Commissioner Olli Rehn said Friday.
Over in India, traditionally the world’s biggest gold buying nation, the central bank today proposed new restrictions on gold bullion imports as part of its annual monetary policy statement. The Reserve Bank of India proposes restrictions on banks importing bullion on a consignment basis, allowing them only to import gold to meet the needs of gold jewelry exporters.
“The banks import gold on consignment basis from a miner without investing anything and it remains the property of the miner until the bullion dealers take delivery,” explains Bachhraj Bamalwa, director of the All India Gems & Jewellery Trade Federation.
“If they are not allowed to buy on consignment basis, imports will be restricted and chaos will prevail in the market.”
The RBI says detailed guidelines will be published by the end of this month. Back in January India’s authorities raised the import duty on gold to 6% in an effort to curb inflows that are blamed for exacerbating the country’s current account deficit.
UBS meantime reports its physical flows to India “continue to indicate very strong demand…at least five times the average over the last 12 months.”
Ben Traynor | BullionVault