Gold Falls On ECB Comments…What's Next?

Wednesday, February 17, 2016

gold barsGold has had an incredibly strong start to the year. As global markets faltered, the value of gold climbed as the result of safe haven investing. However, for the past couple of trading sessions, the value of the precious metal has been falling…and for a relatively good reason. On Monday, ECB President Mario Draghi offered comments that brought a level of hope to European markets. Today, we'll talk about the comments made by Mario Draghi, why this has anything to do with gold, and what we can expect to see from the value of gold moving forward. So, let's get right to it...

Mario Draghi Signals Further Stimulus

The European economy has been struggling for quite some time, that's no secret. In December, we saw movement from the European Central Bank to stimulate the economy by pushing interest rates further into negative territory and extending quantitative easing. However, many economists argued the movements made by the ECB were relatively minimal and that they wouldn't do anything for the bigger picture. Well, these economists proved to be right. Since the ECB expanded economic stimulus, we haven't seen much by way of positive movement in the economy. Now, Mario Draghi made it clear that he is ready to act again. In a statement Draghi readied the European economy for changes that are likely to happen during the March 10th meeting of governors. Here's what he had to say...

“First, we will examine the strength of the pass-through of low imported inflation to domestic wage and price formation and to inflation expectations... Second, in the light of the current financial turmoil, we will analyze the state of transmission of our monetary impulses by the financial system and in particular by banks... If either of these two factors entail downward risk to price stability, we will not hesitate to act.”

Why This Has Anything To Do With The Price Of Gold

One of the biggest drivers in the bullish movement we've seen in gold as of late has been global market conditions. Since global market conditions are heavily dependent on global economic conditions, the statements made by Mario Draghi are huge. The insinuation that Draghi and the ECB will likely act to further stimulate the economy is a positive move for the global market as a whole. After all, the European economy is one of the largest in the world. Ultimately, because the news is positive for the market, it is inherently negative for the value of gold.

Is This The End Of The Bull Run For Gold?

In my opinion, the bull run for gold is far from over. While the news from the ECB is inherently bad news for the value of gold, it's not likely to have a long-term effect. The reality is that the ECB has a history of taking minimal actions followed by a wait and see approach. With that said, I'm not expecting this time to be any different. Chances are that the ECB will do the absolute minimum to stimulate its economy, and that economic conditions will remain poor for quite some time. Also, with the Chinese economy, Japanese economy, and more than 20 other economies around the world still struggling, things aren't looking good for the market as a whole. So, while we may see more downward movement in the short term, I believe that in the long run, gold is still going to run with the bulls.

What Do You Think?

Where do you think gold is headed and why? Let us know your opinion in the comments below!

Joshua Rodriguez

Joshua Rodriguez is an avid financial professional. He is the owner and founder of CNA Finance, a partner at Modest Money, and a writer for US News & World Report, Investing.com, and more! Joshua takes a strong fundamental approach to market analysis and enjoys offering his take on what we can expect moving forward. You can reach Joshua at cnafinancehelp@gmail.com.