• Bullion Up On Stimulus Speculation
• ECB Rate Reception Uncertain
• Chinese Data Disappoints

Gold markets edged higher Tuesday morning after lacklustre manufacturing data boosted investor speculation over a further round of easing measures from central banks in the U.S. and China.

Now trading just above $1, 600 on commodities charts, gold made a recovery from its weaker Monday performance as markets digested news that U.S. manufacturing had contracted for the first time in three years. “Along the whole commodities spectrum, gold pulled back yesterday to $1596.9, driven by a stronger dollar and slightly weaker US equities”, wrote Simon Denham of Capital Spreads in an emailed note.

Today’s slight climb is a result of growing speculation over the likelihood of further central bank intervention to prop up the U.S.’ flagging economy.    

Softer USD Fuels Bullion

Gold traditionally moves in opposition to the USD, acting as a safe haven for investors caught in turbulent times. With further nonfarm payrolls data due Friday – and speculators forecasting a flat result at best – the American economy continues to show its vulnerability in the face of global adverse market conditions.

“Gold prices have been sensitive to signs of economic weakness, which tend to increase the likelihood of monetary easing by the Federal Reserve”, confirmed Lynette Tan, an investment analyst at Phillip Futures Ltd. She went on to explain that, despite the precious metal lacking direction, it is likely to find renewed strength as investor attention turns back to the beleaguered US economy.

ECB Rate Cut “Could Spark Rally”

But there are other factors at work on the price of bullion. Turning his attention to the impending ECB rate decision, Denham added: “Investors are still pondering if the European Union has done enough to alleviate some of the immediate worries or if the expected 25 basis points cut in its interest rate will actually satisfy the markets.”

Speculators are awaiting Thursday’s decision over lending rates in the EU for a further indication of whether growth in euro zone is likely to resume off the back of friendlier rates.

"Rate cuts could spark a rally in gold”, said Jeremy Friesen, commodity strategist at Societe Generale in Hong Kong. “But if there is still uncertainty, credit conditions could remain tight which would hold gold down”, he added.

Chinese Data Stimulates Stimulus Speculation

With further downbeat Chinese manufacturing data emerging from the world’s second largest economy and investor expectation for further stimuli building, bullion has received a double boost as a safe haven choice for nervy investors.

But, as Allister Heath (pictured), editor of City A.M. points out, investor migration to gold may not simply be a result of the prospect of easing from Beijing. The problem, he argues, may run deeper: “The problems facing the Chinese economy are perhaps the most worrying of all; like other economies, it too has pump-primed growth in recent years.

“At some point, however, stimuli cease working and the distortions created begin to hinder, rather than help, the recovery. The authorities in Beijing may well be at that stage.” The expectation from many forex traders and leading brokers, is for China to cut banks’ reserve-requirement ratios. Such a move would be intended to release extra liquidity into the market against a backdrop of sluggish global economic growth.

Whilst the prospect of futile easing measures poses significant problems for China and related currency markets (most notably exporters of natural materials to the production-heavy Chinese), further Chinese trouble should only serve to bolster bullion further.

Sarah Cox, Markets Writer. ForexSpace.com