Gold Gains On ECB News

Watching the price of gold throughout the first half of 2016 has been a lot like watching a roller-coaster. We've seen plenty of upward movements followed by plenty of downward movements. Nonetheless, recent news from the European Central Bank is helping to support further growth in the precious metal. Today, we'll talk about the news out of the ECB, why it's helping to support further growth in the price of gold, and what we can expect to see from the precious metal moving forward.

Recent News From The ECB

As mentioned above, gold is having a great time in the market at the moment as the result of recent news from the European Central Bank. You see, the European economy has been struggling for some time now, and the ECB has been working to stimulate growth. The newest move in the central bank's work to cause growth in the region is the fact that it has made the decision to extend quantitative easing.

Quantitative easing is a term used to describe the action of central banks purchasing bonds in order to decrease demand for bonds and stimulate growth in corporations. While the ECB has been acting out this process for some time, the central bank recently made a big announcement with regard to extending the program. Now, the ECB will be purchasing massive amounts of corporate bonds in order to stimulate economic growth in the region.

While the central bank has mostly focused on purchasing government bonds, it has decided to purchase corporate debt. The goal here is to give investors an incentive to purchase corporate stocks in order to take advantage of the growth the new funding causes.

Why This Has Anything To Do With Gold

Bonds are an investment that is much safer than stocks. After all, if a corporation goes out of business, it must pay its bondholders back before paying its stockholders. As a result, bonds are often used as safe haven investments. However, with the European Central Bank now scooping up massive amounts of corporate bonds, the returns on these investments are likely to fall to nearly nothing. As a result, the safe haven demand for them will likely diminish in a big way. So, those who used European bonds as a safe haven will now need to find another safe investment. Chances are that the new safe haven investment they move toward will be gold. This should lift demand and lead to big gains in the precious metal. In a statement, Tom Kendall from ICBC Standard's commodities team had the following to offer...

“US 10-year yields are also dropping in reaction to [last Friday's] weak jobs data and decline in benchmark rate expectations... A simultaneous fall in US and European yields should be unequivocally good for gold.”

What We Can Expect To See Moving Forward

If you've followed my writing over the past year or so, you know that I've maintained a relatively bullish opinion with regard to the long run outlook associated with gold since mid-2015. The reality is that gold is what I consider to be the strongest safe haven investment in the world. At the moment, other safe haven investments including US bonds, European bonds, and the Swiss Franc have all lost their glimmer. Leaving gold and silver as the go-to safe haven investments. With global economic and market conditions concerning to say the least, safe haven demand is definitely up, and will likely remain positive throughout the rest of 2016 and moving into 2017. As a result, I'm expecting to see further long run gains in the price of gold.

What Do You Think?

Where do you think gold is headed moving forward and why?