NEW YORK (TheStreet ) -- Gold prices were climbing higher Wednesday as investors dumped stocks for gold headed into Friday's two-day European Union summit.
Gold for February delivery was adding $6.10 at $1,737.90 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,743.20 and as low as $1,723.60 an ounce while the spot price was up $5, according to Kitco's gold index.
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Silver prices were rising 2 cents at $32.77 an ounce while the U.S. dollar index was slightly higher at $78.67.
Investors are opting for gold Wednesday, although big gains will be tempered by a stronger U.S. dollar, which has recently been winning out as the safe haven of choice. With stocks lower, gold could also be sensitive to liquidation as investors raise cash. If sentiment improves, gold could find itself left on the sidelines.
The question is what will happen to gold as the European Central Bank meets on Thursday. Expectations are high for a rate cut and hints of more bond buying. However, there are several scenarios that could emerge. The ECB could cut the rate by 0.25% to 1% as expected, but offer no suggestion of further monetary easing through increased bond buying. The rate cut is widely expected and might be priced into the short term gold price. However, if the move is seen as euro positive gold will rally along with it. In addition, when inflation is high, 3% in the Eurozone, and interest rates are low, negative real interest rates are gold positive. Cash in the bank is worth less and gold becomes a safe place to store wealth.
However, if the ECB does appear willing to engage in more monetary easing, gold could rally. "If you look at historical precedent here in the U.S. as well as other parts of the world where central banks have implemented this lose monetary policy, these have been gold positive signals." said Will Rhind, head of U.S. investment for ETF Securities. Under this scenario, Rhind thinks the euro and gold will diverge from its positive correlation as more money printing would devalue the euro and support gold.
What's more likely is the central bank will punt this decision until after the weekend's European summit, needing more fiscal union before intervening further in the market.
With the heat on eurozone leaders on Friday, the outcome is even more confusing.
If leaders fail to reach an agreement over the weekend, the news is likely to drag on the euro which will hurt gold, despite the fact that safe haven buyers should be rushing into the metal.
Source: http://www.thestreet.com/story/11335807/1/gold-prices-rise-ahead-of-european-debt-summit.html
