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Will gold be a useful hedge against new European economic stimulus measures?

*The Wall Street Journal, by Matt Day, November 3, 2011

‘Gold futures pushed higher Thursday as the European Central Bank’s interest-rate cut boosted the metal’s appeal as an alternative asset and commodities and equities gained as investors bet Greece wouldn’t soon default on its debt.

The most actively traded gold contract, for December delivery, was recently up $30.40, or 1.7%, at $1,760 a troy ounce on the Comex division of the New York Mercantile Exchange.

In a surprise to many market watchers, the European Central Bank said Thursday it would cut interest rates, a move likely designed to stimulate spending in the euro zone’s struggling economy.

‘Any time you have a cut in rates, it makes gold a great alternative’ asset, said George Gero, vice president and metals strategist with RBC Capital Markets.

Gold can see two related benefits from rate cuts.  They make the metal, which offers no guaranteed yield, more attractive compared to interest-bearing investments, and also raise the prospect that easy-credit policies will increase inflation down the line and devalue paper currencies.

Gold’s steep gains since the financial crisis have been helped as governments and central banks in the developed world took steps to ease the availability of credit, and investors bet the excess cash in the system would hit the value of the world’s main reserve currencies.

Gold was also supported Thursday as commodities rose on the view that Greece wouldn’t go through with the referendum on the country’s bailout proposed earlier this week by Prime Minister George Papandreou.  France and Germany warned Greece that the country’s internationally provided financial backstop would be suspended until a referendum takes place, and some reports said Papandreou may resign.

While some investors see gold as a safe haven that should hold its value well when the outlook for other assets is grim, the metal has moved largely in line with commodities and other risky assets in recent months.  Worries about a potential credit crunch in Europe have caused traders to cash out of the metal amid economic storm clouds, rather than add to their holdings.

Commodities markets were also lifted Thursday by a Labor Department report showing new claims for unemployment benefits in the U.S. fell last week, dropping below the 400,000 mark for the first time in more than a month.  Many economists say claims must fall below that mark for the economy to be adding more jobs than it is losing.

Gold Wednesday broke a three-day losing streak, rising as the dollar weakened and investors bet that the Federal Reserve’s steady easy-money policies would continue to boost the metal’s appeal as an alternative asset.”

*This information is solely a highlight of the opinion of a third-party publication and is incomplete.  Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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