We Are Not Alone

The euro strengthened after the ECB's Peter Praet said negative rates and asset purchases remain an option, according to a Wall Street Journal article.

 The euro declined the most in two years on Nov. 7 after ECB President Mario Draghi unexpectedly cut its main refinancing rate to a record-low 0.25%, saying at the time that their "monetary-policy stance will remain accommodative for as long as necessary." Europe's inflation unexpectedly slowed in October to 0.7%. That compares with an ECB target of "close to but below" 2%.

"This is really the first time in recent history an ECB policy maker suggests QE is possible in the euro zone," Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc., said. He added that the possibility is remote, however. We're not so sure. 

The fear of deflation is weighing heavily on Western economies far more than inflation is. It's not discussed nearly as often as the chief bugbear of potentially rapidly rising prices, but it remains a topic in every meeting, whether its the Fed, the ECB, Bank of England or Bank Of Japan. 

 You simply can't grow economies on inflation moving at fractions of 1%. 

GDP growth in the EU slowed to 0.1% in the third quarter, from 0.3% in the previous three months, a separate survey showed.

 The fall in the euro this month has had repercussions for gold, since the dollar trades inversely from the European currency. Thus, the dollar rose and helped an already shaky gold price slip even more.

 Thus far this year, the euro has risen about 6.5% while the dollar has strengthened to the tune of 4%. That 2.5% disparity has helped gold stay reasonably steady.

 Because of a container-ship-load of factors, not the least of them the interconnectedness of the two zones' financial establishments, the U.S. and the EU are bound together. If one inches a notch this way, the other must respond. If one catches a cold, the other one will catch it, too.

  Leaving India aside for a moment, there is a curious lack of physical demand for gold. A couple of culprits may be at work. Both publicly and privately the Chinese may have sated their appetite for the moment. Gold, like any other jewelry component is a prisoner of fashion. It seems that gold has fallen from favor in Western countries, especially the United States. On the other hand Arab countries and central Asian countries are seeing brisk consumer demand, although consumer demand alone cannot move prices unless the country concerned is India. 

 By some surveys,purchasing of gold from outside the country has fallen 80%. Gold already in India has risen dramatically, especially among more tradition-bound segments of Indian culture, which demand the metal for occasions ranging from marriages to coming of age celebrations (similar to American Sweet 16 parties) to gifts that are simple acts of generosity to one's friends, relations or neighbors. 

 The import taxes imposed by India's central finance authority has gutted the import market.

 There was, indeed, some short covering and bargain hunting today in gold during the afternoon session. It helped to a small extent.

 However, we have to keep our eyes on the Fed as we approach the December meetings. Recall that one of the Fed's targets is 3.1% growth. If it's much below that, and if employment growth is stagnant or backslides, don't bet on tapering in December.

 However, you might bet that certain elements in the world of finance will interpret even the mildest "bad" news from Fed talkers as the end of the yellow metal's primacy.

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Wishing you as always good trading, 

 Gary S. Wagner - Executive Producer