U.S. markets were down slightly across the board this morning, while European stocks were well into the green following yesterday’s quantitative easing announcement by the ECB. Gold and silver each eased about 0.5% off of yesterday’s close this morning due to some profit-taking, but this is also partly due to the dollar continuing to rise. The greenback rose above 95.0 on the DXY index before sliding back just a bit, as the index has added a remarkable 2.5 points in just a week. This has been fueled by the tumbling euro and falling oil prices: the two major crude benchmarks were mixed this morning, with Brent crude up about 0.7% and WTI down 1%. Markets seem to be hesitant amid the uncertainty that surrounds Greece’s possible exit for the euro area following this Sunday’s elections.
Yesterday in the Markets
Gold rose $9.20 to close above $1,300 for first time since August, continuing a rally that will likely give gold its third straight week of advances. The rest of the precious metals were also strong: silver was up 1.1%, platinum rose 0.95%, and palladium was up 1.31% by the closing bell. Stocks climbed to notch their 4th straight day of gains. The euro fell to 11-year low, which means that gold’s rally has been even steeper priced in euros; the yellow metal rose by 3% in euros yesterday, posting a €200 gain over just the past two weeks.
Factors Affecting Gold Today
The market reactions to the larger-than-expected ECB stimulus announcement have been varied and far-reaching. The ECB indicated that September 2016 is not a firm end-date for this new QE program. This essentially lays out the central bank’s playbook: devalue the euro so the government debt of the member nations will likewise be devalued, and easier to pay off. This is a fairly common tool used by central banks, and the ECB is not alone in acting; in the lead-up to yesterday’s announcement, several other central banks (in India, Denmark, Turkey, and Canada) have unexpectedly slashed their interest rates in order to combat deflation.
With this as the global backdrop, German Chancellor Angela Merkel is demanding “urgent fiscal reforms” from her European neighbors. She stresses that the EU member nations need to handle their sovereign debt burdens now, before interest rates rise again. Merkel can point out that Germany balanced its budget a year ahead of schedule while still (marginally) growing the economy. Germany would like to make these structural reforms a contingency of the ECB stimulus, but everything seems to hinge on Greece’s decision in Sunday’s elections.
Europeans have been buying more gold leading up to to ECB stimulus, while the Russian government has also been a net buyer. Russia added to its gold reserves for the 9th consecutive month, pushing its stockpile of the yellow metal to its highest levels since 1993. This puts 11% of Russia’s forex reserves in gold, which makes sense considering it is likely safer to hold onto gold than rubles or euros at this point. Meanwhile, the QE in Europe is actually benefiting Russia (and Vladimir Putin) a great deal: the country’s stock and bond markets were up as capital leaves Europe in search of higher yields. If the same sort of capital outflows pour into the U.S. in search of a less deflationary environment than Europe, the financial markets may begin to resemble their inflated state 90 years ago, just before the crash of 1929. Though we can’t expect anything great in the near-term for the Eurozone economy, solid PMI data did show that at least it’s moving in the right direction.
Crude oil continues to pile up, as producing nations resist cutting production in order to hold on to their market share. With crude inventories in oversupply, don’t expect oil prices to bounce back much in the near-term. The crude benchmarks got a bit of a reprieve when news broke this morning that the Saudi Arabia is vowing to maintain its policies regarding oil in the wake of the death of King Abdullah.
Stocks were up in Asia with the announcement of yet more government intervention into the economy in Japan. Concerns are growing in China about the structural stability of the country’s financial markets, as three of China’s biggest firms were recently frozen from opening new accounts on margin, and regulatory authorities are opening various corruption investigations. The situation is continuing to develop,
In Zimbabwe, many of the country’s gold mines have had to cease operations with relatively low gold prices and high electricity tariffs for the mining industry. The impact could be especially bad, considering gold sales make up half of the country’s export revenue. The lack of production, and resulting drop in global supply, could provide a small bump to prices until the situation is resolved.
PMI Services Flash and the Dallas Fed manufacturing index, both for January, will be released on Monday.