Gold At A Turning Point After ECB’s Unprecedented Action - CMC Markets
By Neils Christensen of Kitco News
Monday June 9, 2014 12:10 PM
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(Kitco News) - The European Central Bank’s unprecedented monetary policy announcement last week could be the turning point the gold market needs to generate long-term momentum, said a market analyst.
Colin Cieszynski, market analyst at CMC Markets, said in a research report released Tuesday that in the last few months he has noticed gold’s primary influence has shifted to the euro from the U.S. dollar.
He said one major factor behind gold’s lackluster performance is European banks’ repayment of the central bank’s loans from its first Long-Term Refinancing Operation during the last 18 months. This repayment process allowed the ECB to embark on “stealth tapering,” as it reduced its balance sheet by about a trillion euros, he said.
During the same time period, the Federal Reserve embarked on its third round of quantitative easing program.
“You would have thought that with all that money the U.S. was printing that gold would have shot through $2,000, but it didn’t,” he said in an interview with Kitco News.
He added that this scenario demonstrates that gold is reacting more to the ECB’s balance sheet than to the Federal Reserve’s.
Cieszynski admitted the link between gold and the ECB isn’t obvious, but the trend has become made clearer over the last few years.
A major factor behind Europe’s growing influence over gold is the interconnectedness within the region, he said.
“Before the eurozone was created if Greece had a problem it was considered only their problem. Now because of the currency and the growth of the European Union, a problem in Greece causes concerns for investors in Germany and France,” he said. “Europeans also see gold as an important store of wealth, more than North Americans, so if they become nervous they are more likely to buy gold to protect themselves.”
Since 2010, during the height of the European financial crisis, gold acted as a safe-haven asset against geopolitical and financial instability. However, Cieszynski added the ECB’s shift in monetary policy could cause the yellow metal to revert back to its traditional function as a hedge against inflation.
To stimulate growth and boost inflation, the ECB opened the flood gates: cutting interest rates, announcing a new EUR400 billion LTRO program, ending its weekly sterilization program and introducing the possibility of outright asset-backed purchases, Cieszynski explained.
“This means that we could see the ECB restore (EUR565) billion of the (EUR1) trillionish it took away or about a 56% restoration,” he said.
He added that gold’s immediate rally following the ECB monetary-policy meeting “may have signaled a major turning point for the yellow metal after nearly three years of declines.”
“If gold continues to follow its recent trend of tracking the size of the ECB balance sheet, it could potentially stage a 56% retracement of its losses over the last few years in the coming months. A 50% to 62% retracement of the previous downtrend suggests the $1,555 to $1,640 zone could potentially be probed,” he said.
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