Advertise | Bookmark | Contact Us | E-Mail List |  | Update Page | UraniumSeek.com 

Commentary : Gold Review : Markets : News Wire : Quotes : Silver : Stocks - Main Page 

 GoldSeek.com >> News >> Story  Disclaimer 
 
Latest Headlines

Gold Seeker Closing Report: Gold and Silver Trade Mixed with Stocks
By: Chris Mullen, Gold Seeker Report

CFTC refuses to address GATA's questions about gold and silver market rigging
By: Chris Powell

Trumpís Dilemma And Refuting The Gold/Yuan Peg Theory
By: Dave Kranzler

Eagle Plains Completes Royalty Agreement with Denison Mines
By: Eagle Plains Resources Ltd.

While The Bulls Fiddle With The 'Fundamentals,' Rome Burns
By: Avi Gilburt

Let Your Own Eyes Interpret This Chart
By: Rick Ackerman

Does Flat CPI in November Imply Flat Gold?
By: Arkadiusz Sieron

Yellen Warns Another Financial Crisis Is Brewing
By: GoldCore

Gold Seeker Closing Report: Gold and Silver Gain with Stocks
By: Chris Mullen, Gold Seeker Report

A Certain Perspective
By: Michael Ballanger

 
Search

GoldSeek Web

 
The End of Quantitative Easing and Gold


 -- Published: Friday, 6 July 2018 | Print  | Disqus 

June was hot for the central banks. The Federal Reserve lifted the federal funds rate for the second time this year, while the European Central Bank announced that it would end its bond purchase program by the end of 2018. It would mean another step towards normalization of the crisis-era monetary policy, which would end quantitative easing on both sides of the Atlantic Ocean. What do these important developments imply for the gold market?

 

On June the 13th, the Fed raised interest rates for another 25 basis points. It was the second hike in 2018 and the seventh in this tightening cycle. The move was widely expected, so it did not shake the markets. However, the Fedís statement was more hawkish than anticipated, as the U.S. central bank suggested two more rate hikes this year.

 

The next day, on June the 14th, the ECB released its timid monetary policy statement, followed by Draghiís press conference, which contrasted with the Fedís decisively hawkish stance. It was interpreted as dovish, because it stated that the quantitative easing program would end only at the end of the year. Moreover, the ECB promised that there will be no hikes in interest rates at least through to the summer of 2019. Thus, Draghi announced the end of the asset purchase program, but with a dovish flavor.

 

Indeed, the Governing Council downgraded its Eurozone growth forecast from 2.4 percent previously to 2.1 percent, emphasizing the rising risks to the outlook. ďThis decision has been taken in the presence of a strong economy with increasing uncertaintyĒ, said Draghi.

 

However, somewhat counterintuitively, gold gained in the immediate response to the Fedís hawkish announcement and the ECBís dovish meeting. In a sense, it shouldnít be surprising at all, as ďsell the rumor, buy the factĒ used to be dominant strategy during this tightening cycle: the yellow metal weakened prior to the Fedís meetings, but rallied afterwards.

 

But the fact that gold prices were able to rise for a while amid the surge in the greenback is significant and requires a more detailed examination. We offer two points about this unusual development. First, the ECBís stance is actually not as dovish as some analysts interpret it. Why? Remember the Fedís tapering? The U.S. central bank announced it in December 2013, not providing any specific ending. In contrast, the ECB put a specific end-date on its stimulus, which could be considered a more decisive step compared to Fed. Moreover, Draghi downplayed the turmoil in Italy, although some analysts forecasted that turbulence on the Apennine Peninsula could force the ECB to adopt a more cautious approach. But it didnít happen. Draghi said that ďcontagion was not significant, if any, if at all, so it was a pretty local episode and so we havenít seen the redenomination risk.Ē

 

Second, it might be the case that the well-established negative correlation between the greenback and the shiny metal has somewhat weakened, allowing gold to stay afloat or even climb amid strengthening dollar. Letís look at the chart below, which paints the gold prices and the broad dollar index. As one can see, the dynamic of one asset looked like the mirror image of the other until May Ė but then something happened and the correlation has weakened since.

 

Chart 1: Gold prices (yellow line, left axis, London P.M. Fix, in $) and U.S. dollar index (red line, right axis, broad trade weighted index).

 

 http://www.goldseek.com/news/2018/7-6as/1.png

 

What has happened? Well, as we explained in the November 2014 edition of the Market Overview, greenback and gold sometimes move in tandem and itís nothing special. It usually happens when investors fear about the future of the  Eurozone and the euro.

 

However, there is another possible explanation: with the Fedís hike behind it, gold investors look now at heightened market volatility and rising inflation explanations (see the chart below, which paints the CBOE VIX index and the measure of a measure of expected inflation derived from 5-Year Treasury Constant Maturity Securities and 5-Year Treasury Inflation-Indexed Constant Maturity Securities). Both of them have been rising in June.

 

Chart 2: CBOE VIX (green line, right axis) and 5-Year Breakeven Inflation Rate (red line, left axis, in %) in 2018.

http://www.goldseek.com/news/2018/7-6as/2.png

 

Another issue is that gold investors are forward-looking. The Fed has just hiked interest rates seventh time since December 2015. So it is quite deep into a tightening cycle, with rather limited room for U.S. rates to move substantially higher relative to the Eurozone. The federal funds rate stands now at 1.75-2 percent, while its longer-run estimations show 2.9 percent level, which implies just four more hikes. In contrast, the ECB has only announced to wind down its bond-buying program and it will not lift its interest rates before the summer 2019. Hence, the ECB is likely to start hiking when the Fed will run out of steam. It might be fundamentally bullish for the euro and possibly for gold as well in the medium term, however a lot will depend on the market sentiment.

 

Thank you.

 

Arkadiusz Sieron

Sunshine Profits - Free Gold Analysis 

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 


| Digg This Article
 -- Published: Friday, 6 July 2018 | E-Mail  | Print  | Source: GoldSeek.com

comments powered by Disqus



 



Increase Text SizeDecrease Text SizeE-mail Link of Current PagePrinter Friendly PageReturn to GoldSeek.com

 news.goldseek.com >> Story

E-mail Page  | Print  | Disclaimer 


© 1995 - 2019



GoldSeek.com Supports Kiva.org

© GoldSeek.com, Gold Seek LLC

The content on this site is protected by U.S. and international copyright laws and is the property of GoldSeek.com and/or the providers of the content under license. By "content" we mean any information, mode of expression, or other materials and services found on GoldSeek.com. This includes editorials, news, our writings, graphics, and any and all other features found on the site. Please contact us for any further information.

Live GoldSeek Visitor Map | Disclaimer


Map

The views contained here may not represent the views of GoldSeek.com, Gold Seek LLC, its affiliates or advertisers. GoldSeek.com, Gold Seek LLC makes no representation, warranty or guarantee as to the accuracy or completeness of the information (including news, editorials, prices, statistics, analyses and the like) provided through its service. Any copying, reproduction and/or redistribution of any of the documents, data, content or materials contained on or within this website, without the express written consent of GoldSeek.com, Gold Seek LLC, is strictly prohibited. In no event shall GoldSeek.com, Gold Seek LLC or its affiliates be liable to any person for any decision made or action taken in reliance upon the information provided herein.