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Bank of England Rate Cut, Stimulus Help Gold Prices Surge

August 4, 2016 at 17:35 by Andrew Moran

Gold prices surged on Thursday following an announcement from the Bank of England (BOE) that it would slash interest rates and present further monetary stimulus. Accommodative policies from the likes of the Bank of Japan (BOJ) and the European Central Bank (ECB) are helping push gold prices up.

December gold futures rose $6.20, or 0.46%, $1,362.30 per ounce at 17:00 GMT. The yellow metal gained some steam at the start of Thursday’s trading session because US jobless claims were below historical norms and market expectations.

Silver was not able to garner momentum from the BOE’s rate cut. September silver futures dipped $0.03, or 0.16%, to $20.40 an ounce. Silver has climbed more than 40% this year.

BOE Governor Mark Carney confirmed on Thursday that it would slash its key lending rate by a quarter of a percentage point to 0.25%. The central bank also ignited a few monetary stimulus measures, including bringing back its bond-buying program. This seemed to have surprised financial markets everywhere.

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment.  At its meeting ending 3 August 2016, the MPC voted for a package of measures designed to provide additional support to growth and to achieve a sustainable return of inflation to the target.  This package comprises:  a 25 basis point cut in Bank Rate to 0.25%; a new Term Funding Scheme to reinforce the pass-through of the cut in Bank Rate; the purchase of up to £10 billion of UK corporate bonds; and an expansion of the asset purchase scheme for UK government bonds of £60 billion, taking the total stock of these asset purchases to £435 billion.  The last three elements will be financed by the issuance of central bank reserves.

The BOE’s measures come as the BOJ and Japanese government unleashed their own economic and monetary stimulus tools earlier this week. It is apparent that Japan is still trying to make Abenomics a success.

Investors will be waiting for the release of the Department of Labor‘s report for July’s employment situation in the US. The importance of the non-farm payrolls data has been heightened after a wave of mixed economic signals in the past month. If the number of jobs added is on par with June then it may provide the Federal Reserve with further ammunition to raise interest rates in September.

However, with other central banks enacting accommodative policies then it may hinder the Fed’s plans of a rate hike this year.

According to the CME Group FedWatch tool, there is just a 12% chance of a September rate hike.

Precious metals have been benefiting from ultra-loose monetary policy, low and subzero interest rates, and sluggish global economic growth. In a rising rate environment, gold’s luster is diminished because it does not provide any yield so investors seek out bonds and riskier assets.

If you have any questions and comments on the commodities today, use the form below to reply.

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