Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Will Fresh QE From ECB Boost Gold?

Commodities / Gold and Silver 2015 Nov 25, 2015 - 12:39 PM GMT

By: Bob_Kirtley

Commodities

The threat of deflation in the Eurozone is an issue that continues to plague the ECB. The current easing measures have failed to drive inflation above 0.3%, which is far short of the 2% inflation target that the ECB is mandated to reach. This has led ECB President Mario Draghi to begin the discussion of further QE to stimulate prices in the region. Just last week Draghi commented that:

“We consider the APP [asset-purchase programme] to be a powerful and flexible instrument, as it can be adjusted in terms of size, composition or duration to achieve a more expansionary policy stance… We will do what we must to raise inflation as quickly as possible. That is what our price stability mandate requires of us.”


Dovish remarks such as these signal the markets that more QE is coming from the ECB. Following the GFC, massive quantitative easing from the Fed drove gold prices to new all-time highs, yet similar sized programs, including those of the ECB, have failed to fuel a bull market in gold. Here we will discuss why an increase in the ECB’s easing measures now will not just fail to be bullish for the metal, but will in fact be likely to drive gold prices lower.

The Currency Argument

New QE from the ECB will see the Euro weaken relative to the USD. The chart below clearly shows that since the ECB first began discussion of new easing measures in mid-2014, the Euro has fallen significantly. We believe that this decline is likely to continue as we approach the launch of fresh easing from the ECB.

In the US the Fed is moving ever closer to the beginning of a new tightening cycle. Increasingly hawkish statements from the Fed and speculation that the first hike will come this December has led to the USD reaching 10 year highs. This strength has also been a product of the monetary policy of other central banks moving in the opposite direction. Case in point, the ECB introducing more quantitative easing.

Now consider the effect of a stronger US dollar on gold. Historically as the US dollar has rallied gold has fallen in US dollar terms, and vice versa. Therefore, if the US dollar strengthens then one would expect gold to decline. Given that the US dollar and Euro often have an inverse relationship, it is clear that if the Euro weakens, then gold could follow suit. Accordingly, we reach the conclusion that from a currency standpoint alone, gold will fall if the ECB increases their monetary easing programs.

Why ECB QE Will Not Be Bullish For Gold

Many gold bulls in 2014 called that the introduction of new QE would re-ignite the bull market and drive the yellow metal to new all-time highs. The reasoning was simple, QE from the Fed had fuelled the gold bull market for years, so why should QE from the ECB be any different?

The answer to this is simple, ECB QE has had a different effect on gold, because it is a different type of program. The measures used by the Fed during QE1 and QE2 were broad based programs. Their goal was to stimulate the economy by keeping interest rates low. To do this the Fed targeted buying long term Treasuries to push the price of that debt higher and the yields lower.

However, this has not been the goal of the ECB. Long term interest rates are already at all-time lows, so instead the ECB’s QE programs target Asset Backed Securities (ABS) to incentivize bank lending. An ABS is a financial security backed by a loan, lease or receivables against assets other than real estate and mortgage-backed securities. This means that the ECB’s QE program was similar in nature to QE3 from the Fed, which targeted Mortgage Backed Securities (MBS).

Given that the ECB is already using targeted QE and that targeted QE has been successfully used in the US, it’s logical that the ECB will again use targeted QE. This means that they will not use the broad based measures similar to QE1 and QE2 that drove gold higher. Therefore we do not expect that new easing from the ECB will drive gold higher.

ECB QE Will Be Directly Bearish

Targeted programs will be used when the ECB increases their easing measures. We have established that these will not have a bullish effect on gold as they differ subtly but significantly from the easing programs that fuelled the gold bull market. However, we are yet to cover why new measures in Europe will drive gold lower, rather than simply not push the metal higher.

In the US QE3 was successfully used to stimulate growth and improve the health of the employment sector. While the employment sector has not recovered to full strength, shown by a lack of significant wage inflation, jobs growth has been considerable. Therefore, although employment has not reached its full potential, QE3 has resulted in an economy that is ready for higher rates and tighter monetary policy. This means that targeted measures can be effectively used to improve long term economic health.

If this conclusion extends beyond the US, which we and most economists agree it does, then targeted QE can be used to increase inflationary pressures in Europe and avoid the threat of deflation. From this we can see that if the ECB’s new QE programs are successful, then over the long term inflation and economic health in the Eurozone will rise.

This means that further measures are unlikely to be necessary, and that in fact over the longer term monetary policy will begin to tighten, which will be highly bearish for gold. This view will likely be priced in to markets as the ECB’s QE is shown to succeed, which means that gold is likely to be sold off as the new measures take effect.

As the economic health of the Eurozone increases we are also likely to see gold sold off as a safe haven asset. Improvements in the economy generally lead to investors becoming less risk averse, as the probability of a significant downturn is decreased. This means the “risky” assets, such as stocks, become more favourable than safe haven assets, such as gold. Therefore gold is likely to be sold as the economy improves simply because it is a safe haven asset.

Accordingly, we believe that fresh QE from the ECB will be directly bearish for gold, rather than just non-bullish.

What If the New Measures Don’t Work?

The argument can be made that the current measures from the ECB have failed, as these now need to be increased to combat the still weak inflation outlook, and that because they have failed all future programs will also fail. We believe that this argument is flawed for a two key reasons.

Firstly, the view that just because the most recently announced easing programs from the ECB have been unsuccessful, all future attempts will also be futile is naive. In the US, QE3 was the third round of easing from the Fed under the quantitative easing banner, and even QE3 was initially considered unsuccessful. After being announced in September 2012 the Fed increased QE3 at their December meeting that year. This shows that the initial program may not achieve all of the desired targets, but can still be successful when increased or adjusted.


Secondly, although the inflation situation in Europe is poor, it has not severely weakened. In fact, core inflation has improved in the region with a print of 1.1% in October. While this appears soft on the surface, it is worth noting that in the US core inflation is only 1.9% and the Fed is approaching a rate hike. This means that although the current ECB measures are not enough, they are on the right track. Therefore it is likely that an increase in ECB QE would be effective in the same way that the increase in QE3 was.

When we consider the effect on gold prices, the key factor is the markets perception of the programs. It matters little whether one personally believes that the current measures have worked, as the markets hold the view that they will work over the long term. This means that the long term effect of gold being lower due to higher interest rates will likely be priced in while the programs are in place. This is true regardless of whether they are effective at that time, as markets believe that the ECB’s action will eventually drive growth in the region, which will necessitate higher rates.

How to Trade Gold from Here

We hold the view that more QE from the ECB will be bearish for gold prices. Additionally, we believe that the Fed will hike this December and that this action will drive gold lower. Together these actions are likely drive the US dollar higher and gold consequently lower. Therefore, we clearly believe the right trade is to be short gold, but when is now the right time to open new shorts?

Gold has fallen around $100 since mid-October when the Fed signalled that they would hike in December if data remained steady. This selloff has led to the yellow metal becoming oversold, as shown by the RSI, which is currently at 32.92. The MACD is also poised for a sub-zero bullish crossover. These crosses have often signalled a rise in bullish momentum and at least a small rally higher. Therefore gold has the technical potential to move higher from here.

The $1080 level is likely to impede this, but gold has failed to break significantly beneath the level. This indicates that the resistance is yet to be fully broken, and therefore is unlikely to fully stop a rally higher if gold breaks to the upside.

Although we hold the view that the fundamentals are highly bearish for gold, we admit that the current technicals show that the metal has the potential to move higher in the near term. Therefore we would not look to add new gold shorts at this stage. Whilst we are maintaining a core short, we intend to wait until gold approaches resistance at $1150 before adding new short trades. This would ensure that these positions are opened at optimal levels to take advantage of the bearish effects of new ECB QE.

We will signal our subscribers when we open these positions, providing them with the exact trades that we open in our own portfolio. We will also be publishing our regular market updates with further analysis of the effects of new ECB QE, the Fed meeting this December, and how we are trading gold to our subscribers only. So for more information on how to become a subscriber, please visit www.skoptionstrading.com.

Go gently.

Bob Kirtley

Email:bob@gold-prices.biz

URL: www.silver-prices.net
URL: www.skoptionstrading.com

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. Winners of the GoldDrivers Stock Picking Competition 200

DISCLAIMER : Gold Prices makes no guarantee or warranty on the accuracy or completeness of the data provided on this site. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This website represents our views and nothing more than that. Always consult your registered advisor to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this website. We may or may not hold a position in these securities at any given time and reserve the right to buy and sell as we think fit.

Bob Kirtley Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules