Draghi and the ECB

As we spoke about yesterday, there is truly a divergence between the actions and the policies of the Federal Reserve and the European Central Bank. This chasm continues to widen.  Whereas the United States is currently winding down its monetary stimulus program, the ECB is initiating new rounds of quantitative easing.

Today, we got one more piece to the puzzle that composes the global central banks. In an expected move, the European Central Bank today announced an expansion and extension with their existing quantitative-easing program. In essence, this announcement can be considered dovish and open ended.

According to Bloomberg News, “The European Central Bank expanded its quantitative easing program to exceed €2.2 trillion by the end of 2017, buying at a reduced monthly pace with the caveat that it can step up or prolong purchases if needed.”

This expansion of monetary stimulus by the ECB coincides at a time when the Federal Reserve is diminishing its accommodative monetary policy. Although next week’s interest rate hike announcement by the Federal Reserve is not etched in stone, the current consensus is that there is an extremely high probability that it will be announced at the conclusion of next week’s FOMC meeting.

Most importantly, what effect can we expect to see as this chasm between monetary policies of the ECB and the Fed continues to widen? One thing seems for certain. Currently, the United States is driving economic growth both at home as well as globally.

The net result has been that global equities continue to gain in value. Since the election of Donald Trump last month, global equities have gained more than $2 trillion in value. While on the surface it might be considered tremendous growth, a deeper look reveals that global bonds have lost roughly the same amount of equity, alluding to a rotation of capital rather than pure growth.

Precious Metals and the US dollar

The current differential between current actions and policies of the ECB and the Federal Reserve has been, and is, extremely supportive of the US dollar. Today the US dollar gained over eight tenths of a percent closing above 101 on the Dollar Index.

Gold was able to slightly compensate for today’s dollar strength, closing only four tenths lower on the day. As of 4 o’clock EST is trading at 1172, off roughly $5.50.

Silver did not fare as well, losing roughly $.21 in value, a decline of 1 ¼%. According to many, there are some things going on in the silver pits that doesn’t seem quite right. The individuals, and their respective firms, which have labeled themselves as “stop busters,” have much to do with it. But that’s a story for another day.

On a technical basis, both gold and silver are still trading above their 61% retracements of their yearly range.  As such, no real technical damage was seen in the charts due to today’s downside move.

We still believe that there is a strong possibility that precious metals’ prices will find support in this area and move to higher ground over time.

Wishing you as always, good trading,