Gold Prices Struggle As ECB Slowly Sets Groundwork For Policy Normalization
(Kitco News)- Gold prices pushed deeper into negativeterritory after the European Central Bank seemingly took the first step towardnormalization of monetary policy by dropping its easing bias Thursday, analystssaid.
Recently, the gold market hasbeen highly sensitive to currency markets, specifically movements in the U.S.dollar, but the focus could now be shifting to interest rates. Economists seethe tide slowing turning after the ECB tweaked its forward guidance, settingthe groundwork to normalize interest rates eventually.
After leaving interest ratesunchanged, the central bank removed the reference that it could increase itsquantitative-easing measures if necessary. But the central bank also kept itsreference saying that interest rates will remain at present levels for anextended period.
The ECB’s statement and commentsfrom President Mario Draghi helped push the euro briefly higher against the U.Sdollar, but more importantly for gold, the German 10-year bond yields rosesharply above 0.7% -- their highest level in two weeks -- before giving upgains
Some analysts have pointed outthat global monetary policy tightening would be detrimental to gold. Asinterest rates move up, gold’s opportunity costs increase. Comex April goldfutures last traded at $1,321.2 an ounce, down 0.48% on the day.
Andrew Grantham, senior economistat CIBC World Markets, said that he expects this is just the start of whatcould be further shifts in tone from the ECB as the September deadline for itsasset-purchase program quickly approaches. CIBC expects European interest ratesto start rising in 2019.
Looking ahead, Grantham addedthat ECB officials will be more nuanced in their forward guidance as thecommittee members will be reluctant to spark a significant rally in the euro.
While the central bank hasadjusted its forward guidance, Draghi said that it is too early to declarevictory on inflation.
“Underlying inflation is subduedand has yet to show convincing signs of a sustained upward trend,” said Draghiin his press conference following the central bank’s monetary-policy meeting.
Draghi’s comments come as thecentral bank made only a slight modification to its inflation outlook. Thecentral bank sees inflation rising 1.4% this year, unchanged from its Decemberforecast; however, inflation next year is expected to increase only 1.5%, downfrom the bank’s previous estimate of 1.9%. Inflation in 2020 is expected torise 1.7%, unchanged from the last projection.
Although inflation will remainmuted, the central bank is slightly more optimistic on economic growth, seeingthe region’s economy growing 2.4% this year, up from December’s estimate of1.3%. GDP is expected to increase by 1.9% in 2019, unchanged from the previousestimate. The economy is expected to grow 1.7%, unchanged from December’sforecast.
“Incoming information, includingour new staff projections, confirms the strong and broad-based growth momentumin the euro area economy, which is projected to expand in the near term at asomewhat faster pace than previously expected. This outlook for growth confirmsour confidence that inflation will converge towards our inflation aim of below,but close to, 2% over the medium term,” Draghi said in his opening statement.
Draghi added that the risks to the Europeaneconomy are reasonably balanced. However, he noted that global factors,including rising protectionism and developments in foreign exchange and otherfinancial markets, pose the most significant risks to the region’s economy.
By Neils ChristensenFor Kitco News
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