ECB Accelerates Its Asset Purchases. Gold Needs Fed To Follow Suit.

The ECB accelerated its asset purchases, but unless the Fed follows suit, gold may continue its bearish trend.

On Thursday (Mar. 11), the European Central Bank decided to accelerate its asset buying under the Pandemic Emergency Purchase Program:

Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year.

The decision came after a rise in the European bond yields that has mirrored a similar move in the U.S. Treasuries (see the chart below). Christine Lagarde, the ECB President, was afraid that increasing borrowing costs could hamper the economic recovery, so she decided to talk down the bond yields.

Indeed, the growth forecasts for the EU have deteriorated recently amid the persistence of the pandemic and painfully slow rollout of the vaccines. According to the ECB, the real GDP of the bloc is likely to contract again in the first quarter of the year. So, the increase in the market interest rates could additionally drag down the already fragile economic recovery:

Market interest rates have increased since the start of the year, which poses a risk to wider financing conditions. Banks use risk-free interest rates and sovereign bond yields as key references for determining credit conditions. If sizeable and persistent, increases in these market interest rates, when left unchecked, could translate into a premature tightening of financing conditions for all sectors of the economy. This is undesirable at a time when preserving favorable financing conditions still remains necessary to reduce uncertainty and bolster confidence, thereby underpinning economic activity and safeguarding medium-term price stability.

Implications for Gold

What does this all mean for gold prices? Well, the ECB’s move should prove rather negative for the price of gold, at least initially. This is because the loosening of the European monetary policy could weaken both the euro and gold against the U.S. dollar. Indeed, as the chart below shows, although the price of gold increased on Thursday, it declined one day later.

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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 ...

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