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Will Dovish Draghi Plunge Gold?

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Draghi sounded dovish at the recent ECB press conference. Will he sink the price of gold?

We have alreadycovered the last ECB monetary policy meeting on Friday. However, the event was so important that it needs a more detailed analysis. The question is why the euro declined against the U.S. dollar despite the fact that theECB reduced the volume of purchased assets, as was expected by the markets? The reason is that Draghi and his colleagues sounded surprisingly dovish. First, the bank did not set the end date for quantitative easing. So, the ECB may extend the asset purchasing program even beyond September 2018 if the inflation rate remains subdued.

Second, Draghi excluded the possibility of a sudden end to asset purchases. Hence, there might be another reduction (or recalibration) before the termination of the quantitative easing program.

Third, Draghi called the possible changes a recalibration of (...) asset purchases, not tapering or a reduction. It seems to be just semantics, but Draghi could want to signal and point out that the ECB did not abandon the ultra loose monetary policy.

As a result of that easing bias, the markets expect the ECB to wait until 2019 before raising interest rates. It would mean that Draghis eight year tenure could end without an interest rate hike. Such expectations imply a stronger U.S. dollar, which is not good news for the bullion market.

What does it all mean for the gold market? Well, the recent ECB statement threw a lot of cold water on the latest moves upward in the EUR/USD exchange rate. This is actually what we predicted in the September edition of theMarket Overview . We wrote:

Our take is the ECB may announce a tapering in October or December, especially since it could otherwise run out of bonds to purchase, but it should keep a very accommodative stance, due to still subdued inflation. () Hence, the rise in the EUR/USD exchange rate should be fundamentallybullish for the gold market in the medium term. However, the euro, and thus the yellow metal, could fall in the short-term against the U.S. dollar, as market expectations for the ECBs pace of tightening are probably too elevated.

Hence, although the medium-term bullish trend in the euro may continue which should support gold prices the shared currency may depreciate in the short term, which should be negative for the yellow metal. Stay tuned!

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Thank you.

Arkadiusz Sieron, Ph.D.
Sunshine Profits Gold News Monitor and Market Overview Editor

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About the author

Arkadiusz Sieron is a certified Investment Adviser. He is a long-time precious metals market enthusiast, currently a Ph.D. candidate, dissertation on the redistributive effects of monetary inflation (Cantillon effects). Arkadiusz is a free market advocate who believes in the power of peaceful and voluntary cooperation of people. He is an economist and board member at the Polish Mises Institute think tank. He is also a Laureate of the 6th International Vernon Smith Prize. Arkadiusz is the author of Sunshine Profits’ monthly Market Overview report and daily Gold News Monitors, in which he keeps subscribers up-to-date regarding key fundamental developments affecting the gold market and helps them prepare for the major changes.

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