The European Central Bank unexpectedly cut interest rates and announced two new bond-buying programs yesterday, which led to an uptick in the price of gold as the markets opened today.
It was expected that some sort of stimulus package would be put forth by the bank, but the aggressiveness of this move has surprised many and indicates that officials are perhaps more concerned about the recent period of low inflation and the impact it could have on the eurozone’s economic recovery. The 18 countries that use the euro as currency showed no growth for the second quarter of 2014, which is what led officials to act so quickly.
The ECB’s actions could be both good and bad for gold, but long-term will probably benefit the precious metal. While many investors seek out gold as a hedge against monetary stimulus, the shift could also weaken the euro and strengthen the dollar, making it more expensive to purchase gold with other currencies. But the ECB can only cut rates so much, and if this stimulus doesn’t have enough of an effect, it could prove to be even worse for global economies.
Further cuts to interest rates are unlikely simply because they cannot get much lower. The already record low of .15% has now been reduced to .05%. This rate is what determines how much banks pay when they borrow from the ECB, but lending activity has been stagnant in recent months and as rates approach zero, the cuts have less and less of an effect.
If this does not have a significant impact, and many believe it will not, the worst case scenario, according to analyst Marco Valli at UniCredit would be a Quantitative Easing program similar to what has been happening in the U.S. A QE program for the euro could be a devastating blow to the strength of the currency, which will of course lead many to seek a haven in precious metals and dump their euros for gold in the same manner that many investors have been doing for the dollar.