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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold Rises To 13 Month High as ECB ‘Bazooka’ Shoots Blanks

Commodities / Gold and Silver 2016 Mar 11, 2016 - 02:18 PM GMT

By: GoldCore

Commodities

Gold prices climbed to a 13-month high in dollar terms overnight ($1,282.51) after the increasingly adventurous, dare one say reckless, European Central Bank unleashed its latest ‘bazooka’ and initiated more interest-rate cuts, a significant extension in currency printing and bond purchases and also a potential subsidy to banks lending.


Gold in EUR – 1 Year

Draghi cut the ECB’s deposit rate by a further 10 basis points to minus 0.40 percent, and its main refinancing rate to zero and announced that the ECB may buy nearly a whopping €1 trillion in corporate debt.

The move was even more dovish than expected and confirmed, if any confirmation was necessary , that the ultra loose monetary policy adventure has intensified and will actually deepen in the short term.

Gold reached 3 year highs in euro terms at €1,161.40 per ounce on Monday after 4% gains last week – likely anticipating ‘Super Mario’ Draghi’s latest attempt at pulling a rabbit out of the hat. There is likely an element of ‘buy the rumour and sell the news’ as year to date euro gold has already eked out strong gains of 17%.

On the announcement yesterday, the euro fell initially versus gold from €1,135 per ounce to €1,155 per ounce prior to reversing and falling back to €1,135 per ounce as the euro strengthened. Gold in euro terms was actually marginally lower by the close yesterday and is marginally lower this week after the multi-month record high on Monday.

Huge volatility was seen in all markets as Draghi surprised even the monetary doves by making already ultra loose monetary policies even looser. This was most evident in the foreign exchange markets where despite deepening currency debasement the euro surged in value. Versus the dollar, the euro surged from 1.082 to over 1.11 in minutes or a near 3% surge. By the end of the day, the euro had surged from 1.082 to over 1.121 or a move of over 3.6% in a few hours.

Such volatility is more akin to a casino rather than a stable foreign exchange market between two leading international mediums of exchange. It is great for and welcomed by CFD providers, spread betters, brokers, hedge funds and speculative banks. But it has real world economic consequences for small and medium enterprises and all EU companies and international companies trading in the EU. Such volatility and extremely rapid moves in the value of the two world’s leading trading currencies is a sign that something is very wrong with the monetary system.

It will likely badly impact many employment generating companies in the import and export sectors and is not good for the trading of goods and services internationally and for world trade. Trade and commerce, the backbone of the economy is being put at risk in order to protect the interests of banks and a dysfunctional banking, financial and monetary system. This is a simplification, but it is largely the truth.

The strength of the euro yesterday was counter intuitive and given the scale of manipulation in markets today may have been due to intervention. A collapse in the value of the euro during and immediately after Draghi’s speech would not be welcomed by monetary moderates – labelled hawks – in the Bundesbank, in Germany and elsewhere in Europe and indeed by savers and depositors throughout the monetary dis-union.

Stocks moved higher briefly prior to giving up gains as did bonds. This is likely due to Mario Draghi saying thathe didn’t anticipate further rate cuts. Stock and bond markets are now hopelessly addicted to the cocaine of cheap money and currency debasement. Something that will not end well and bodes ill for these markets.

The ECB’s drastic action reeks of panic and was not the panacea that “cheap money” addicted banks and markets had hoped for.

“Insanity is doing the same thing over and over again and expecting a different result.” So said Albert Einstein and the ECB is in danger of not realising that its QE programme and ultra loose monetary policies are failing. You cannot print your way to prosperity and it may be slowly dawning on market participants that you cannot print your way out of deflation.

Markets remain subject to a weird combination of irrational complacency and significant denial. But beneath this comes a deepening concern amongst the smart money that the imbalances that brought the global financial system to its knees in the first financial crisis remain and are in many cases worse today.

There is a distinct whiff of 2008 in the air. However today, the belief in central banks as monetary saviours of the universe is increasingly in doubt. Indeed, there are real and growing concerns that they are contributing to the creation of much bigger financial bubbles with similar if not worse consequences.

The financial insurance that is physical gold has never been more important to own.

LBMA Gold Prices
11 Mar: USD 1,262.25, EUR 1,136.50 and GBP 883.03 per ounce
10 Mar: USD 1,247.25, EUR 1,137.04 and GBP 876.67 per ounce
09 Mar: USD 1,258.25, EUR 1,146.69  and GBP 884.16 per ounce
08 Mar: USD 1,274.10, EUR 1,155.69 and GBP 894.35 per ounce
07 Mar: USD 1,267.60, EUR 1,156.96 and GBP 896.13 per ounce

This update can be found on the GoldCore blog here.

Mark O'Byrne

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