Gold is consolidating above the eight-month low established on Monday at 1207.76. Yesterday’s rebound stalled as the euro tumbled to new 14-month lows today, boosting the dollar in the process.
The euro came under renewed pressure after German Ifo confidence missed expectations. Perhaps most significant was the further deterioration of expectations to 99.3 from 101.7 in August, reflecting a lack of confidence that the most recent easing by the ECB — and persistent jawboning about QE — will successfully reinvigorate the flagging European economy.
ECB President Mario Draghi reiterated once again that the central bank stands ready to do more and that policy will remain loose for a long time. “Monetary policy will remain accommodative for a long time and I can tell you that the (ECB) Governing Council is unanimous in committing itself to using the tools at its disposal to bring inflation back to just under two percent,” Draghi said.
Continued indications of a deteriorating economy and more assurances that further easing would be forthcoming, pushed the EUR/USD rate below 1.28 for the first time in more than a year. Draghi also kept the pressure on governments to enact fiscal reforms to improve competitiveness.
Fresh euro weakness pushed the dollar index to a four-year high above 85. Despite the new multi-year highs in the greenback, gold continues to hold above key support.
The Wall Street Journal broke a story today that long-serving PBoC governor Zhou Xiaochuan is about to be sacked by President Xi Jinping. This may be as innocuous as Xi solidifying his grip on power by filling key positions with his own supporters. On the other hand, there is speculation that Zhou’s reluctance to provide looser monetary conditions in the face of a slowing economy warrants his replacement in the eyes of Xi.
I have always maintained that China must maintain a rapid growth pace or risk civil unrest. People from the countryside continue to stream into the cities hoping for good jobs and a chance at moving into the middle class. If the economy stalls — or even slows to the point where these new workers can’t be readily absorbed — it could lead to big problems for the government.
The age of easy monetary policy is far from over, even as this reality pushes the global economy ever-closer to the brink. With this in mind, gold seems to be a great bargain at these levels.