fbpx

Draghi’s Bazooka Backfires, Gold Explodes – Ep.150

  • Mario Draghi at the ECB fired his big bazooka today; people had anticipated that that would be the case
  • In fact, it seems like he fired a bigger blast than people were expecting, he announced that he would reduce negative interest rates further
  • They moved from -.3 to -.4 and he announced an expansion of their quantitative easing program from €60 billion per month to €80 billion, which means that their program is not larger than the Fed’s; remember we were doing $85 billion a month before we tapered it down
  • So what the ECB is doing is closer to $90 billion
  • The problem for the market is that even though he fired a bigger blast than the markets had anticipated, after he fired it, he put that bazooka back in his holster
  • What I mean by that, is at the end of his press conference, Draghi mention that he thought that this would probably be the last cut, that -40 is as low as the ECB is going to go
  • Now maybe the market was just looking for an excuse to reverse, but the Euro, which had initially dropped sharply, about 1.5% down on the day, following the initial announcement, reversed and ended up falling about 2%, so it was a 3.5% reversal, and from what I’ve read, this is the biggest reversal, ever in the euro, from down to up
  • In fact the dollar index went through 4 handles, at its highs this morning, the dollar index was at 98.5 and at its lows it was trading at around 95
  • Many people think this is a failure for the ECB; they want a weaker euro, because they want more inflation
  • I think the ECB is going to get more inflation, whether the euro weakens or strengthens against the dollar, because it’s still going to weaken in real purchasing power
  • Just as I mentioned in yesterday’s podcast, referring to the Reserve Bank of New Zealand, Mario Draghi is saying that he doesn’t have enough inflation, and interestingly enough, Draghi is going to get more inflation, and more than he’s bargaining for
  • He mentioned in his press conference that these things take time, because it will take time for inflation for develop because first we need the recovery to regain traction, as if inflation is a by-product of economic growth – it’s not.
  • It’s a by-product of all the money printing
  • It’s just that right now, a lot of that money printing is in the financial assets
  • But all this QE and negative interest rates are not going to get economic growth
  • Now maybe the Eurozone economy will grow, but it’s not because of QE, it’s despite QE
  • In fact, there would be more growth, if the ECB wasn’t doing this, what they are doing is counter productive
  • But ultimately they will succeed in getting more inflation, in fact they will get more than they bargained for
  • I predict that prices in the Eurozone will not only hit the 2% target, it will exceed it, and that will mean the ECB is going to have to quickly withdraw that stimulus, they will have to raise rates much faster than they thought and much higher than they thought, but at least they’ll do it
  • We can’t. that’s the big difference.  Europe can afford higher rates, America cannot
  • Europe is going to have the Bundesbank pressuring the ECB fight that inflation; there will be no such pressure on the Fed from the United States
  • Normally, too, when the ECB eases, gold goes down and that was the knee-jerk reaction, as soon as the announcement came out, the price of gold dropped about $15, but it reversed very quickly and it ended up finishing up $19
  • We’re talking about a $35 intra day reversal, in fact, the low was below $1240, but ever since the price of gold closed above $1250, it has never closed below $1250
  • This is the highest close of the year, it’s the first time I’ve see gold close above $1270
  • Gold stocks closed at their highs of the year, the GDX index of gold miners was up 4.5% today closing at $20.38 – this is the first close above $20 all year
  • The key level for gold is going to be $1280
  • We’ve touched that level twice, once last week and once Monday morning
  • Everytime we’ve touched it we’ve had a huge sell-off, back to $1250 or lower
  • So that’s the key resistance; we’ll see if we can close above that tomorrow, Friday which would necessitate another $10 increase in the price of gold
  • That would be extremely significant and the next move would take gold North of $1300
  • The significance of what’s going on here is that gold is strengthening, even though the ECB is easing
  • Normally, when the ECB eases, the dollar goes up
  • Even though negative interest rates and more QE in Europe are bullish for gold, because those reckless inflationary monetary policies weaken the euro against the dollar, you typically see gold sell off, because the dollar is rising
  • I’ve always said this does not make sense – it’s not that the dollar strong, it’s that the euro is weak, and a weak euro is not bad for gold
  • Since gold is traded off the dollar, anything that strengthens the dollar has been perceived as negative for gold, even if the dollar is strengthened by weakness in another currency
  • Weak currencies are bullish for gold
  • The most  bullish for gold is when the dollar is weak, and that’s what I think is about to happen
  • Now that Draghi has let the cat out of the bag, that this is as easy as the ECB is going to go
  • So going forward, now the markets will start to factor in the end of QE in Europe, the end of negative interest rates
  • Because if this is as low as Europe is going to go, the next thing is going to be a tightening
  • So I think the easing cycle is coming to an end
  • Meanwhile, the Fed is about to launch its new easing cycle
  • It’s starting from a very low level, because interest rates are still only 25 basis points
  • I believe as the ECB is ending its easing program, we are beginning our easing program
  • The Fed began tightening a couple of years ago when it started the taper talk, and it ended tightening when it raised interest rates by 25 basis points
  • I don’t expect the Fed to raise interest rates again; they might surprise me and do it, but I doubt it
  • The analyst from Goldman Sachs, Jeffrey Currie, reiterated his bearish call because he believes the U.S. economy is recovering and that the Fed is going to raise interest rates 3 times in 2016 and that’s why he thinks the price of gold is going down.