The main event in the market yesterday was Mario Draghi’s press conference. The ECB President unveiled some details about the coming bond-buying program. How can all this new information influence the gold market?

The first point is that the purchases of €60bn of bonds per month are going to start as soon as the coming Monday. This rush may be considered a bit surprising, given the upped growth forecasts after better economic news from the Eurozone (the ECB revised the GDP growth forecast from 1 percent to 1.5 percent). However, the inflation forecast was lowered to 0 percent this year, down from a previous forecast of 0.7 percent.

Taking into account the projected flat prices, Draghi’s optimism seems to be just another trick of the expectations whisperer. The QE will be probably more effective if investors believe in it.

Perhaps the more important piece of news is that President Draghi admitted that the ECB’s QE program could extend beyond September 2016, the theoretical end date of the program, if inflation isn’t on a ‘sustained path’ by then. It means that this QE is rather open-ended, just like the Fed’s third round of the QE, and therefore it may last practically forever, given the current sluggish economic growth and deflationary pressures.

Another significant point is that the ECB would buy government bonds only in the secondary market, with maturities between 2 and 31 years and with yields above the interest rate corridor floor of -0.2 percent. Some analysts wonder whether the ECB would be able to find the sufficient amount of the debt to make its QE program viable. We believe that the more important problem may be whether investors would be willing to sell the bonds, because they are expecting even higher prices and lower yields. Thus, everything depends on the price offered by the ECB. However, it is true that the QE will probably aggravate the lack of the supply of good quality assets available to investors, which could lower the yields even more.

What are the possible consequences of the QE for the gold market? First, the QE may translate into lower interest rates, which is generally positive for gold, as lower interest rates mean lower alternative costs to holding gold. Second, the QE may induce the search for yield as it squeezes risk premiums, which would be rather negative for the gold, considered traditionally as a safe haven. However, European banks are rather deleveraging and trying to reduce their exposure to risk at the moment. The third QE channel is the currency channel. The new ECB stimulus may weaken the euro and strengthen the U.S. dollar, which could be negative for gold prices expressed in the greenback. However, the yellow metal has been holding its value expressed in the U.S. dollar for a few last months, though the U.S. dollar index has been rising. Yesterday gold priced in euros rose, but was rather flat in terms of the greenback.

Summing up, some details on the European QE were revealed. They did not change significantly the overall picture of the Eurozone economy, because what Europe needs are structural reforms. President Draghi admitted it himself during the press conference and called fiscal policymakers to conduct labor market reforms. It is a bit ironical, because his QE program of buying government bonds will decrease yields on sovereign bonds and remove the very incentive for structural reforms.

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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