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BookmarkGold has been stuck in a trading range since its dramatic fall earlier in the year. Many times these trading ranges signal that a market doesn’t really have a strong conviction of the direction of the asset, and thus they simply trade the chart. But this may be coming to an end because this Thursday we have a potential catalyst that may put a fire under gold, and reward investors of physical gold and the gold ETF’s (GLD, PHYS,CEF).
On November 7th, 2013, the ECB will be meeting to discuss policy and many analysts foresee the possibility of an interest rate cut, or even additional measures to add liquidity to the Euro system (think quantitative easing). We believe the ECB will have no choice but to at least but interest rates, and there is a good likelihood that they will engage in other liquidity inducing measures – which is good for gold.
Why? First of all, Europe has not improved in terms of its economic or unemployment situation, especially in the Southern bloc of nations where youth unemployment is surging. In Spain, youth unemployment is 56%, inFrance its 26%, in Greece its 65%, and in Italy it hit a new all-time high of 40%. These numbers are staggering, and because of the ECB’s reluctance to fight deflation, the business environment hasn’t improved and youth are languishing unemployed and potentially unemployable as their skill sets deteriorate.
But more importantly, on the political front this is causing some major headaches for the ECB and the European Union as sentiment toward the Euro (and thus the Euro project) wanes. For example recently in France, Marine Le Pen’s anti-Euro Front National party defeated the establishment’s Gaulliste UMP in a runoff election in Brignoles. The Telegraph’s European political analyst, Ambrose Evans-Pritchardcomments on this with the following:
I am watching this with curiosity, since Marine Le Pen told me in June that her first order of business on setting foot in the Elysee Palace (if elected) would be to announce a referendum on membership of the European Union, with a “rendez-vous” one year later:
I will negotiate over the points on which there can be no compromise. If the result is inadequate, I will call for withdrawal. Europe is just a great bluff. On one side there is the immense power of sovereign peoples, and on the other side are a few technocrats.
Asked if she intended to pull France of the euro immediately, she hesitated for a second or two and then said: “Yes, because the euro blocks all economic decisions. France is not a country that can accept tutelage from Brussels.”
This is certainly not the type of candidate that Mario Draghi and the ECB want to see governing France.
It isn’t only France. In Italy, Prime Minister Enrico Letta acknowledgedthat the growing anti-euro and anti-EU sentiment is a significant danger to the European project, and many believe the only way to combat this is to switch from austerity to growth. In Britain, the U.K. Independence party, which favors an immediate withdrawal from the EU is gaining momentum. Even in Germany, the Alternative for Germany party nearly cleared the 5% threshold to join Parliament and is gearing up for the May European vote. All across Europe we are seeing that people are deeply dissatisfied with the euro and the EU and change is becoming a greater option.
This is all something that the ECB is surely monitoring because it needs the political support of all the nations because one exit could destroy the euro. The only way that this anti-euro sentiment can be combated is through economic recovery, which means that the ECB will have to loosen its tight policy to be one more geared towards growth rather than austerity.
It is not only that the ECB has to change its policy to encourage growth – it has to do it relatively soon because European parliamentary elections are coming in early 2014 and if they put in an anti-euro parliament, there may be no turning back.
That’s where Thursday’s meeting fits in. The ECB needs to begin to encourage growth through whatever means they can, and we feel that the meeting (which has a scheduled press conference afterwards), may be the best one to begin this change in policy.
Finally, how does this fit in with gold? As experienced gold investors know, to understand gold you have to understand the geo-political scene because of gold’s role as an alternative currency to all sovereign currencies. If the ECB, the second most influential central bank, is changing its policy from austerity to encouraging growth via monetary easing, then that may have a significant effect on the gold price. Essentially, what they would be doing would be increasing the European monetary base (euro negative) and encouraging mild inflation – which is a big reason why people hold gold.
If the ECB announces a significant policy change, this may be a significant turning point for the current two year downdraft in gold. This simply adds to our belief that investors should continue to accumulate physical gold and the gold ETF’s (GLD, PHYS, CEF) because gold fundamentals are very positive, it just needs a catalyst for a big move. For investors looking for higher leverage to the gold price, they may want to consider miners such as Goldcorp (GG), Newmont Mining (NEM), Randgold (GOLD), or even some of the explorers and silver miners such as First Majestic (AG). But as we always emphasize, buying gold miners includes many other risks that are not present with owning physical gold, so investors should make sure that they do their due diligence before investing in any particular miner or explorer.
We believe that the political situation in Europe is becoming more toxic towards the Euro, and the ECB knows this very well. This meeting may be the first signaling a major policy shift towards easing and a European “easy-money” strategy – which may be just what is needed to light a fire under gold. Investors should pay close attention to this ECB meeting.
