Draghi Won't Send a Rate Hike Gift to the Gold Bulls / Commodities / Gold & Silver 2019

The ECBeased its monetary stance. It launched another round of cheap loans to banksand promised to keep interest rates unchanged this year. It means that Draghiwill not hike during his presidency. What does it all mean for the gold market?

ECB Unveils NewMonetary Stimulus in Response to Slowdown

The ECB left its interestrates unchanged. But it pushed out the timing of its firstpost-crisis rate hike until 2020 at the earliest. As we can read in the monetary policy statement.

The Governing Council now expects the key ECBinterest rates to remain at their present levels at least through theend of 2019, and in any case for as long as necessary to ensure the continuedsustained convergence of inflation to levels that are below, but close to, 2%over the medium term. 

It meansthat Mario Draghi will end his mandate as the ECB President without hiking theinterest rates. Moreover, the ECB slashed its growth and inflation forecastsfor 2019 and lowered those for 2020 and 2021. The bank now sees euro zonegrowth at barely 1.1 percent this year, compared to the 1.7 percent itprojected in December. And it sees the CPI rateto rise only to 1.6 percent in 2021. Acknowledging that Europe’s slowdown couldbe longer and deeper – after all, Germanystagnated in the fourth quarter, while Italy was in outright recession – theECB offered banks a new round of cheap loans, called TLTRO-III, to helprevive the euro zone economy.

A new series of quarterly targeted longer-termrefinancing operations (TLTRO-III) will be launched, starting in September 2019and ending in March 2021, each with a maturity of two years. These newoperations will help to preserve favourable bank lending conditions and thesmooth transmission of monetary policy.

In short,according to Draghi, “we’re coming – and maybe we still are – in a period ofcontinued weakness and pervasive uncertainty”. This is why the economicforecast has been revised downward – and why the ECB consequently eased itsmonetary stance.

Implications for Gold

What doesit mean for the gold market? Well, more dovish Draghi is fundamentally bad newsfor the yellow metal. Many economists hoped that the ECB will join the Fed and will normalize its monetary policy. However, it is not going to happen anytime soon.The latest ECB decision should, thus, strengthen the US dollar against the euro – and gold –especially that the move was rather surprising. 

You see,the greenback still appears as the only reasonable choice among the fiatcurrencies. Both the ECB and the Bank of Japan have not normalized its monetary policy. The People’s Bank of China has launched a fresh stimulus. The Bank of Englandpauses, preparing for Brexit. Instead of normalizing its monetary policy, the BoE has activated euroswap line, in order to shore up financial system in case of abrupt exit fromthe EU.

In suchan environment, the Fed and its currency are the only game in town. It’s stillthe best looking house in a bad neighborhood. Indeed, the euro fell againstthe US dollar in the aftermath of the ECB monetary policy meeting, asone can see in the chart below.

Chart 1:EUR/USD exchange rate from March 7 to March 9, 2019

And theU.S. dollar index reached a new 2.5-month high. Unfortunately, whatstrengthens the greenback, hurts gold. Indeed, initially the yellow metalstruggled following the ECB meeting. However, the selling pressure in the U.S. stock market helped the gold prices to rebound and go north, as the chart belowshows.

Chart 2:Gold prices from March 6 to March 8, 2019

Weacknowledge, of course, that the Fed pauses, but it still means that the divergence in monetary policies between the UScentral bank and the ECB – and the resulting gap between bond yields in America and Europe – will remain in place, supportingthe greenback against the euro and gold. Moreover,stronger dollar should translate into lower US inflation– but, on the other hand, it also gives more leeway for the Fed to lean dovish.

Thank you.

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Arkadiusz Sieron
Sunshine Profits‘ MarketOverview Editor

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