Gold hit a fresh record high near $1,465 an ounce on Thursday after European Central Bank president Jean-Claude Trichet indicated the rate hike announced by the bank earlier may not be the first in a series. Spot gold hit a record $1,464.80 an ounce and was bid at $1,460.50 at 1420 GMT, against $1,457 late in New York on Wednesday. US gold futures for June delivery were up $3.80 an ounce to $1,462.30, having peaked at $1,467.
The ECB lifted interest rates by 25 basis points on Thursday as expected, but Trichet said in a press conference after the move that the bank had not taken the decision as the first in a string of such moves. "The market had factored in that Trichet would be a bit more hawkish in his comments," said Peter Fertig, a consultant at Quantitative Commodity Research. "If you look at government bond markets, they all recovered during his press conference."
"Of course they will be vigilant in monitoring inflation developments very closely. But it is more inflation expectations that made the ECB concerned, and less the actual increase (in inflation)." Gold tends to suffer in a rising interest rate environment, as this raises the opportunity cost of holding non-interest bearing bullion. Expectations for a rise in eurozone rates kept a lid on gold's rally to record highs earlier this year.
That came largely on the back of unrest simmering across the Middle East and North Africa, which has lifted risk aversion, and boosted oil prices to multi-year highs. A Nato air strike killed at least five rebels near the Libyan port of Brega, medics said, and insurgents reported Muammar Gaddafi's forces killed five more in a bombardment of besieged Misrata.
"The tail risk event remains uncertainty in the Middle East leading to a supply side-driven spike in the oil price," said Citigroup in a note. "Historically the biggest beneficiary under an oil price spike environment has been gold, with large amounts of petro dollars being recycled into the yellow metal."
Holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, slipped more than 7 tonnes on Wednesday to their lowest since May 2010, their biggest one-day drop in more than two weeks. Interest in ETFs, which issue securities backed by physical metal, has been muted since the start of the year, with the SPDR recording its biggest ever quarterly outflow in the first three months of 2011.
"Other factors have to be used to explain the rally of gold prices, and there are plenty of them; besides the weak US dollar, the debt crisis in the eurozone peripherals is also clearly playing a role," said Commerzbank in a note. "Portugal bowed to pressure yesterday evening and not unexpectedly requested financial aid from the EU rescue fund. The country is set to receive around 80 billion euros as soon as possible." Meanwhile, banks led European shares to their highest level in nearly a month as strategists said interest rate rises would not derail equities' advance and a bailout for Portugal would give stability. Among other precious metals, silver was bid at $39.48 an ounce against $39.43, just off the previous session's 31-year high at $39.75. Platinum was at $1,784.24 an ounce versus $1,787.45, while palladium was at $780.97 versus $778.10.