Gold Sees Physical Buying Interest

Gold firmed in overseas trading on Thursday as the retreat within the range established on Monday attracted renewed physical buying interest. The dollar index retreated from a seven-week high at 81.18, helping to underpin the yellow metal somewhat.

Gold has since slipped back to unchanged on the day after the ECB offering nothing more than some modestly stronger language in its forward guidance. The ECB kept the refi rate at a record low 0.25%, which was widely anticipated even though ECB President Mario Draghi said last month that a rate cut had been discussed. The market however was looking for something more in light of the further drop in eurozone inflation in December to just 0.8% y/y; like a negative deposit rate.

Draghi reiterated the central bank’s easing bias, saying that he sees interest rates at current or lower levels for an extended period of time. “We remain determined to maintain the high degree of monetary accommodation and take further decisive action if required,” said Mr. Draghi.

Draghi stated once again — perhaps a little more emphatically — that “All instruments allowed by the treaty would be eligible. Let me make this point quite clear.” In making that point “clear” he would not say specifically what they were considering.

The BoE also held steady on policy today as well. The discount rate and the QE target were left unchanged at 0.5% and £375 bln, respectively.

I’ve said it in previous comments this week, but I’m going to say it again: The age of über-easy monetary policy in nowhere close to being over.

In the FOMC minutes from the December meeting that were released yesterday, the ongoing easy-money bias of the Fed came across loud and clear, despite the decision to scale back asset purchases by $10 bln a month. The heightened concern about the inability of the Fed to stoke inflation that was evident in the policy statement was on display in the minutes as well.

One might expect that with the unemployment rate above the 6.5% target and inflation well below the 2% target, the Fed might well have opted to keep asset purchases at $85 bln per month. However, was also concern expressed at the meeting about the waning benefits of QE: “A majority of participants judged that the marginal efficacy of asset purchases was likely declining.”

So while there was some optimism expressed about improvements in the labor market, couched with persistent concerns about the falling labor participation rate, “a majority” of participants are worried that we’re flushing a great deal money down the toilet each and every month.

One has to wonder which was the primary driver for the taper decision. Was it based on a belief that the economy is truly recovering and gaining momentum? Or was it based on a realization that QE just isn’t working? For if it is the latter, we’re dealing with a completely different narrative than most are ascribing to the taper.