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Will Lagarde and Mnuchin Push Gold Higher?


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The ECB held its monetary policy stance steady. Meanwhile, the U.S. fiscal deficit reached its all-time high. What does it all mean for the gold prices?

On Thursday, the members of the Governing Council of the ECBmet together to undertake monetary policy decisions. They decided to leave theinterest ratesand the conditions of thequantitative easingunchanged. This lack of action was widely expected, so attention shifted to the fresh economic projections and theLagarde's press conference. Importantly, theECBlifted its growth forecast for 2020 from -8.7 to 'just' -8.0 percent. With inflation projections almost unchanged, the recent monetary policy statement sounded a little bit morehawkishthan the previous one.

However, the most important part was whatLagardesaid during her press conference. Or, actually, what she did not say. First, she did not provide any clues about the expansion or extension of the monetary stimulus. Lack of anydovish hintsis supportive for theeuroand the price of gold - against the U.S. dollar.

Second, she did not say that the recent appreciation of the euro constituted a problem. Lagarde emphasized that the ECB is not targeting exchange rates as it is not a monetary policy tool. So, for the Governing Council, the recent euro's rise was generally in line with economic fundamentals. Not surprisingly, after Lagarde's comments that suggested lack of any aggressive measures in order to weaken the bloc's common currency, traders took the euro higher.The appreciation of the euro againstgreenbackis supportive for the gold prices which like the weakening dollar.

Implications for Gold

Hence, the latest ECB meeting strengthened the euro against the dollar, which should be welcomed by gold bulls. However, it would be too early that they open a bottle of champagne, asinflationin the eurozone has turned negative, falling from 0.4 percent in July to -0.2 in August, according to Eurostat's flash estimate. Withdeflationin the euro area, the additional monetary measures are just a matter of time. Moreover, there is resurgence in coronavirus infection in many European countries, which may decrease investor and consumer confidence and hamper the economic recovery. In such circumstances, it is more than certain than Lagarde will ease her stance.It's bad news for gold, as thedivergence between the monetary policiesin the U.S. and the eurozone will increase, supporting the U.S. dollar against the euro and gold. As one can see, the divergence in the Treasury yields for the United States and Germany has already bottomed out in April and stabilized somewhat since then.

However, last week Treasury Department published an interesting report that could raise investors' doubts about the strength of the U.S. dollar. It turned out that the U.S. federal budget deficit was above $3 trillion for the first 11 months of fiscal year of 2020, more than double the deficit for full 2019. And with one month to go, September, thefiscal deficitcould go even higher, possibly to about $3.3 trillion. In August alone, the U.S. government created debt worth $200 million, as the chart below shows.

Curiously enough, the government's interest cost to finance is down 10 percent this year, despite the enormous increase infederal debt. Long live low interest rates! Does anyone still have any doubts about the true motives of the ultra easy monetary policy? The very low interest rates do not help anyone but the government!As long as they are low, both Steven Mnuchin, Secretary of the Treasury, and gold are happy.

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Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

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Disclaimer:Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in ourGold & Silver Trading Alerts.



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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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