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[LONDON] Gold denominated in euros is outperforming as markets position for the European Central Bank (ECB) to launch a programme of money-printing, but the policy could boost dollar-priced bullion too.
Euro-gold is hovering near highs last seen in May 2013, while the more liquid dollar-denominated bullion is hitting 4-1/2 month highs just shy of US$1,300 per ounce.
Received wisdom has it that anything that is good for the dollar - like a monetary policy divergence between the ECB and the Federal Reserve - will probably hurt gold, and other assets, priced in the unit.
However, spot gold has rallied at the same time as the US unit. It did so in 2010, when fears over a possible Greek exit from the eurozone prompted risk-averse investors to seek refuge in both gold and the dollar. If quantitative easing fails to deliver stability to the eurozone, the pattern may be repeated.
The ECB is expected to announce on Thursday a programme of quantitative easing (QE) - purchasing government bonds with new money in the hopes of jolting Europe's economy into life.
"There's a possibility that eurozone QE won't work, that the economy will get worse and break-up fears will reignite," Macquarie analyst Matthew Turner said.
"QE has always been seen as the backstop - after that, who knows? Gold benefits when it looks like central banks are losing control."
Spot gold has already shown its sensitivity to financial market uncertainty, rising 5 per cent last week after the Swiss National Bank said it would abandon the franc's euro peg.
That aside, the lower interest rate environment and inflation fears stoked by QE are nominally positive for gold, which has no yield of its own and is often viewed as an inflation hedge.
But there are arguments against betting on a QE-related boost for spot gold this year.
US inflation pressures remain benign despite successive rounds of QE, undermining the appeal of buying gold as a hedge against price pressures. Gold made double-digit percentage gains in the six months after the Fed's first two rounds of QE, but fell in the half-year after QE3.
Easing elsewhere in the world has done little to support spot prices. Japan unleashed the most far-reaching QE programme ever last April. Since then, while yen-denominated gold has risen 11 per cent, spot prices drifted 2 per cent lower.
That would suggest that euro-priced gold is a safer bet in the event of QE. But the outperformance of gold in euro terms this year - it's already up 13.5 per cent - may mean the trade is already overheated.
While arguments can be made both for and against a rise in spot prices in response to ECB action, the very fact that its impact is uncertain is likely to be a plus. "I'd be nervous about saying that the likelihood that QE will lead to a lower euro will be negative for gold, if there are other factors that could boost investment demand," Capital Economics analyst Caroline Bain said.