After coiling in a tight sideways trading range of 300 Euro to 350 Euros per ounce for five years, Gold broke loose in September 2005, to reach a record high of 445 Euros per ounce in December. European Central Bank chief economist Otmar Issing ignited gold's gains when he admitted on October 28th that the acceleration in Euro zone M3 money supply growth is likely to increase inflation pressures in the long run. "Since faster monetary growth appears to have been more fundamental in nature since mid-2004 than was the case between 2001 and 2003, the likelihood that strong monetary developments ultimately find their way through to higher prices must be seen as considerably higher."
The ECB abandoned its strict adherence to its 4.5% money supply target in May 2001, and permitted M3 to grow at an annual rate of 8.5% last year, inflating European equity markets. It has also been associated with sharp rises in house prices in some Euro zone countries, which carry risks of a price bubble emerging, he added. "Strong money and credit growth in a context of already ample liquidity in the Euro area implies that asset price developments, particularly in housing markets, need to be monitored more closely, given the potential for misalignments to emerge," Issing said. However, gold shrugged off the ECB's 0.25% repo rate hike to 2.25% on December 3rd, prompting ECB member Nout Wellink to threaten another repo rate hike in the first quarter. "With given inflation expectations, with the economy getting stronger, the chance of a rate rise increases," Wellink said on Jan 8th.