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Gold jumps as European Central Bank cuts interest rates

November 3, 2011 |  1:25 pm

Gold coins
Gold broke out to a six-week high Thursday after the European Central Bank surprised markets by cutting interest rates.

For investors who believe that paper currencies are headed for further debasement by central banks, the move provided a good excuse to shovel money into precious metals as an alternative.

Near-term gold futures in New York rose $35.50, or 2.1%, to $1,764.20 an ounce, the highest closing price since Sept. 21.

Silver got a smaller lift, adding 56 cents to $34.49 an ounce. Silver had reached a five-week high of $35.29 last Friday.

The ECB, under new chief Mario Draghi, cut its benchmark short-term rate to 1.25% from 1.50%, in the first reduction since May 2009.

Draghi said the cut was justified because he believed the Eurozone economy was headed for a “mild recession.” Europe has been reeling from its debt crisis and from the austerity imposed by government spending cuts.

The euro currency initially slid after the surprise rate move, falling as low as $1.367 from $1.374 on Wednesday. But the euro rebounded after Greece’s prime minister reneged on his threat to hold a voter referendum on the terms of the country’s bailout by the rest of Europe. The euro was at $1.382 at about 1 p.m. PDT.

Draghi vowed the ECB would not accede to calls that it print massive amounts of new money to boost its purchases of sovereign bonds in Europe. But that didn't deter gold buyers.

Gold had rocketed in August, reaching a record closing high of $1,888.70 an ounce Aug. 22, as stock markets tumbled worldwide on fears that the Eurozone would implode.

But as stocks fell further in September, gold and silver too were slammed. Many analysts say the metals took a hit as some investors and traders sold whatever they could to raise cash amid continued market turmoil.

After bottoming at $1,595 on Sept. 26, gold has been fighting its way higher again. It’s now down 6.6% from its August peak but up 24% year to date -- on track for an 11th straight annual gain.


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-- Tom Petruno

Photo: Gold coins and bars. Credit: Mike Segar / Reuters