- Neal Kimberley is an FX market analyst for Reuters. The
opinions expressed are his own -
By Neal Kimberley
LONDON, July 27 As competitors await Friday's
opening of the Olympic Games to begin their quest for gold
medals, they may not be alone in their pursuit of the precious
Gold, set for its best week of gains since late May, may go
higher still, even after being boosted on Thursday by European
Central Bank President Mario Draghi's pledge to do whatever was
needed to safeguard the euro.
An obvious target against the dollar might be the 200-day
moving average, currently $1,654, in thin August markets.
But with the ECB, Bank of England and Bank of Japan all
having, and possibly extending, ultra-loose monetary policies,
there may be alternatives to just a vanilla long gold, short
U.S. dollar position.
Long gold, short euros is a case in point.
Draghi's comments fuelled a general rally in riskier assets,
including gold and the euro.
But Draghi's comments have not been fleshed out with any
detail and comments on Friday from Germany's central bank were
not unequivocally supportive.
Those who think the euro may have overshot in Thursday's
spike, but are mindful that the euro zone financial crisis will
need the ECB to maintain its ultra-accommodative monetary
policy, could favour long gold, short euros.
Long gold, short Japanese yen may also attract.
Not only does the BOJ have an ultra-accomodative monetary
policy, but the Tokyo authorities have made it
clear they would not welcome a further appreciation of the yen.
As for long gold, short sterling, that
combination may resonate with some traders.
While UK monetary policy is ultra-loose, Wednesday's poor
second quarter 2012 British economic output data has raised
question marks over Britain's triple-A credit rating.
Currencies aside, there is a general argument for being long
gold predicated on the fact that recent U.S. economic data has
been disappointing, prompting calls for further monetary easing
by the Federal Reserve.
That would probably entail a third phase of bond purchases,
a form of quantitative easing (QE3), injecting cash into the
economy, as previously employed in 2008 and 2010.
Illustrating the fragility of the U.S. economy, Tuesday's
Richmond Fed composite index, regarded by some analysts as a
good indicator of coming U.S employment data such as the
bellwether non-farm payrolls release, was dire.
With U.S. retail sales having already fallen for three
straight months, if Friday sees downward
revisions to past U.S. economic growth data the
calls for more Fed action might become deafening.
Such a development should give gold a further boost, as, in
practical terms alone, further suppression of U.S. yields would
make it even cheaper to run long gold and short of dollars.
But there are also possible macro-economic consequences of
ever-looser monetary policies that could underpin the value of
gold against the four currencies already mentioned.
VIEW FROM ASIA
Asian reserve managers have vivid memories of 2008 when they
perceived that the first phase of U.S. QE led to injected U.S.
dollar liquidity "leaking" into higher food prices in Asia,
accelerating local inflation.
Some Asian reserve managers are already said to be adding
more gold, which is often seen as good hedge against inflation,
to reserves possibly in anticipation of a repeat scenario.
Such fears may be well-grounded.
Higher food prices might be on their way as money goes where
money is, and environmental factors are already pushing grain
prices, the key base of the food chain, higher.
The U.S. Midwest is suffering its worst drought for 50 years
, a critical fact given that the United States is
the world's largest exporter of corn, soybeans and wheat.
Grain-exporting Russia and Kazakhstan are predicting lower
Monsoon rains in India have been disappointing, a huge
problem when more than half of arable land is rain-fed.
Against this backdrop, the allure of gold, the inflation
hedge, should grow and not just against the greenback.
After all, while the Fed, the ECB, the Bank of England and
the Bank of Japan might be able to print U.S. dollars, Japanese
yen, euros and sterling, they cannot print gold.
With continuing and possibly expanded ultra-accommodative
monetary polices in major economies dovetailing with potential
upward food price pressures in emerging markets, the stars are
aligned for gold to rise further against major currencies.
(Editing by Nigel Stephenson)