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Gold Prices Struggle As ECB Slowly Sets Groundwork For Policy Normalization

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(Kitco News) - Gold prices pushed deeper into negative territory after the European Central Bank seemingly took the first step toward normalization of monetary policy by dropping its easing bias Thursday, analysts said.

Recently, the gold market has been highly sensitive to currency markets, specifically movements in the U.S. dollar, but the focus could now be shifting to interest rates. Economists see the tide slowing turning after the ECB tweaked its forward guidance, setting the groundwork to normalize interest rates eventually.

After leaving interest rates unchanged, the central bank removed the reference that it could increase its quantitative-easing measures if necessary. But the central bank also kept its reference saying that interest rates will remain at present levels for an extended period.

The ECB’s statement and comments from President Mario Draghi helped push the euro briefly higher against the U.S dollar, but more importantly for gold, the German 10-year bond yields rose sharply above 0.7% -- their highest level in two weeks -- before giving up gains

Some analysts have pointed out that global monetary policy tightening would be detrimental to gold. As interest rates move up, gold’s opportunity costs increase. Comex April gold futures last traded at $1,321.2 an ounce, down 0.48% on the day.

Andrew Grantham, senior economist at CIBC World Markets, said that he expects this is just the start of what could be further shifts in tone from the ECB as the September deadline for its asset-purchase program quickly approaches. CIBC expects European interest rates to start rising in 2019.

Looking ahead, Grantham added that ECB officials will be more nuanced in their forward guidance as the committee members will be reluctant to spark a significant rally in the euro.

While the central bank has adjusted its forward guidance, Draghi said that it is too early to declare victory on inflation.

“Underlying inflation is subdued and has yet to show convincing signs of a sustained upward trend,” said Draghi in his press conference following the central bank’s monetary-policy meeting.

Draghi’s comments come as the central bank made only a slight modification to its inflation outlook. The central bank sees inflation rising 1.4% this year, unchanged from its December forecast; however, inflation next year is expected to increase only 1.5%, down from the bank’s previous estimate of 1.9%. Inflation in 2020 is expected to rise 1.7%, unchanged from the last projection.

Although inflation will remain muted, the central bank is slightly more optimistic on economic growth, seeing the region’s economy growing 2.4% this year, up from December’s estimate of 1.3%. GDP is expected to increase by 1.9% in 2019, unchanged from the previous estimate. The economy is expected to grow 1.7%, unchanged from December’s forecast.

“Incoming information, including our new staff projections, confirms the strong and broad-based growth momentum in the euro area economy, which is projected to expand in the near term at a somewhat faster pace than previously expected. This outlook for growth confirms our confidence that inflation will converge towards our inflation aim of below, but close to, 2% over the medium term,” Draghi said in his opening statement.

Draghi added that the risks to the European economy are reasonably balanced. However, he noted that global factors, including rising protectionism and developments in foreign exchange and other financial markets, pose the most significant risks to the region’s economy.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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