NEW YORK–Gold prices briefly shot higher Wednesday on comments by a European Central Bank executive board member that hinted at potential interest rate cuts by the bank.
Peter Praet, the chief economist and a leading member of the ECB’s executive board, said that “there is no doctrine that the main interest rate can’t be under 1%,” in an excerpt of an interview with Germany’s Financial Times Deutschland.
The central bank aims for consumer price inflation of just below 2% over the medium term. Recent inflation data from Germany released Wednesday showed inflation easing, potentially opening the door for the central bank to cut its main rate below the record low of 1%, at the upcoming meeting July 5.
Gold prices erased their losses, climbing to a high of $1,584.60 a troy ounce on the ECB news. Periods of low interest rates favor gold, which doesn’t earn interest, over interest-bearing assets like government bonds, whose return in diminished.
The comments caught gold traders by surprise, said Charles Nedoss, a senior market strategist with Olympus Futures.
“I don’t think that people were looking for Europe to lower rates,” Mr. Nedoss said, adding that moves to cut interest rates would be seen as inflationary and thus beneficial to gold prices.
Gold is widely considered a store of value and a hedge against inflation.
The bounce didn’t last, however, with gold futures slipping back to near unchanged soon after the news amid low trading volumes.
Gold for August delivery, the most actively traded contract, was recently down $2.10, or 0.1%, at $1,572.80 a troy ounce on the Comex division of the New York Mercantile Exchange.
Gold futures trading activity has been especially quiet ahead of the two-day European Union summit, which begins in Brussels on Thursday, as some investors opt to sit out the uncertainty.
“Continued disagreements among eurozone members over fiscal and banking union issues continue to set the tone of trading alongside German Chancellor Merkel’s opposition to joint liabilities in Europe,” said Barclays analyst Suki Cooper in a note to clients.
A weaker euro, which slipped against the dollar, added to pressure on gold. The single European currency has wavered around the $1.25 level as uncertainty about Europe’s economic outlook continues to damp investor interest.
Gold futures are traded in dollars and appear more expensive to investors who use other currencies, damping their appetite for the contracts.
United States Capital Trust LLC. 