Finding itself with a relatively strong currency, the European Central Bank is considering further loosening monetary policy, which could send the yellow metal to new heights. See why here.
When the Federal Reserve slashed interest rates last summer, central banks around the world were quick to follow suit, with some thrusting their bonds into negative territory. Even though gold has had an explosive performance this year, careful market watchers will likely peg this event as the catalyst that started a steady climb in gold prices. And now, according to various experts, this kind of Fed-policy-echoing could happen once again, albeit in a slightly different manner.
Right now, the Fed sports a landmark 2% inflation rate policy, allowing Powell’s team to up the rate past their desired target as-needed to adjust to economic conditions. Another thing of note is that, prior to the pandemic, President Trump voiced that he wouldn’t mind a weaker dollar due to trade disputes and China’s currency manipulation.
Now, the European Central Bank (ECB) finds itself in similar territory. The euro has recently shot up against other reserve currencies, a situation that ECB officials aren’t particularly thrilled about. A strong euro places eurozone exporters on shaky grounds, risks inflationary spikes in individual countries and threatens to slow down the European economy, which has already been stagnating prior to this year’s events.
Mechanical Engineering Industry Association’s chief economist Ralph Wiechers and Natixis strategist Dirk Schumacher both agree that the euro’s strength has become an issue for the ECB. And while some experts note that the ECB lacks straightforward tools to devalue the euro, BNP Paribas expects the central bank to state its desire to depreciate the euro and perhaps introduce some loose monetary policies to support this.
Former ECB vice president Vitor Constancio said that the bank would indeed follow the Fed’s policy on inflation, one that is seen as a significant long-term boon for gold. While the metal has pulled back from $2,000, it has remained above what looks like significant support at $1,940. It now appears to be entering a phase of price normalization as it waits for the next trigger that could send it flying past its new record high.
Prominent investors like Peter Schiff believe inflation will be the next big price driver in the gold market, especially over the longer term. With both the Fed and the ECB issuing massive amounts of stimulus in recent months, it would be difficult to argue against this view. Adding to this the stated willingness of central bankers to subdue the strength of their currencies, gold should have no issue finding the next step on its upwards journey.