Gold and silver prices brightened Thursday as the dollar fizzled against the euro after the European Central Bank kept its key interest rate the same. In doing so it snuffed expectations for a cut in the near term.
In addition, ECB President Mario Draghi's positive comments about the eurozone economy threw stock market investors into "risk on" mode.
"He expressed confidence that indicators have turned positive and has left the ECB confident we would see growth in the second half," Timothy Evans, chief market strategist at Long Leaf Trading in Chicago, said in an email. "He stated that inflationary pressures remained contained and also cited other factors including strong capital inflows into the euro area and a rise in deposits at banks in periphery countries that indicate potential growth in the second half."
Gold futures prices surged 1.17% to $1,678.40 an ounce.
SPDR Gold Shares ( GLD ), tracking a 10th of an ounce of bullion, popped 1.17% intraday to 162.36 in heavy volume. It broke above its long-term 200-day average, but still trades below its shorter-term 50-day moving average, which indicates a weak uptrend.
Considering that gold bullion fell $120 an ounce over the past month, it's normal for it to stage an oversold bounce, said David Hunter, chief market strategist at KCCI Ltd., a brokerage firm in Jersey City, N.J. As a contrarian, he believes precious metals are seeing a short-lived bounce and that they'll plunge deeply this year, owing to a "global deflationary downturn." His target price on gold is $1,000 an ounce and silver $13 an ounce.
Gold is oversold, but could correct to $1,550 an ounce before resuming an uptrend, says Marc Faber, Hong Kong-based publisher of The Gloom Boom And Doom report.
"I am encouraged that sentiment is gradually turning negative," Faber wrote in his January client missive. "I intend to increase my gold position on any further weakness, although I am concerned that U.S. dollar strength could be a headwind for a strong gold rally."
Faber believes cash, stocks and high-yield bonds will lose value over the next 12 months. He believes the S&P 500 will top at its September 2012 high at 1,474 ($148 a share for SPDR S&P 500SPY) and then correct by 20%.
"It seems clear that central banks around the world will continue to keep interest rates down and monetize government debts," Faber wrote. "Therefore in real terms (inflation adjusted), interest rates will remain negative for a long time and continue to erode paper money's purchasing power."
Market Vectors Gold Miners ETF ( GDX ) jumped 2.12% to 45.30. It's consolidating below both its 50- and 200-day moving average, indicating a strong downtrend.
Silver Prices Shine
Silver futures prices climbed 1.78% to $31 an ounce.
IShares Silver Trust ( SLV ) surged 1.87% to 29.90 to barely recover its 200-day line, where it's showing a weak uptrend.
Global X Silver Miners ETF ( SIL ) added 1.76% to 22.51. It's trading above its 200-day but below its 50-day, also showing a weak uptrend.
Dollar Down Vs. Euro
PowerShares DB U.S. Dollar Index Bullish ( UUP ), measuring the greenback against a basket of major foreign currencies, gapped down 1.02% to 21.80. It's trading below both its 50- and 200-day moving averages.
CurrencyShares Euro Trust (FXE), measuring the 17-nation currency against the dollar, jumped 1.44% to 131.51.
As long as the Federal Reserve keeps the dollar printing presses humming, the greenback will keep depreciating, says Anthony W. Welch, a principal at Sarasota Capital Strategies in Osprey, Fla., and co-manager of Currency Strategies Fund .
"More and more transactions are being settled in other currencies for various reasons, yet the supply of dollars continues to grow," he wrote in an email. "More supply and less demand equals falling prices. That being said, it seems no one wants an appreciating currency, and I believe the trends will be more of a zig-zag shape than a straight line."
The ECB kept eurozone interest rates at 0.75%, where they have been since July. Plumper yields boost investor appetite for bonds denominated in the 17-nation currency. However, IHS Global Insight's chief U.K. and European economist Howard Archer believes the ECB will have to cut rates 0.5% in the second quarter. Lower interest rates could lower investor appetite for euros, depressing it against the dollar.
"Indeed, while eurozone economic activity may have seen its low point around last October, we suspect that growth will remain elusive and that already disturbingly high unemployment will continue to rise," Archer wrote in a commentary. "This is likely to put the ECB under increasing pressure to take interest rates lower. Furthermore, we suspect that there will be periodic flare-ups in eurozone sovereign debt tensions as Spain and Italy continue to struggle markedly."
Follow Trang Ho on Twitter @TrangHoETFs .