The Daily Market Report: Gold Slips as Dollar Boosted by Dovish ECB

03-Sep (USAGOLD) — Gold came under pressure after heightened dovishness from the ECB weighed on the euro, boosting the dollar in the process. The prospects of more easy monetary policy from the ECB also lifted stocks.

The ECB held rates steady at the record low 0.05%, as was widely expected. Also as expected — and despite the last 6-months of QE — the ECB cut both its growth and inflation forecasts. ECB President Draghi went on to warn that “we may see negative numbers of inflation in the coming months.” That’s CentralBankSpeak for “DEFLATION”.

In the world of QE, if at first you don’t succeed, print more . . .

During Mario Draghi’s press conference, he announced the ECB had upped the purchase limit for any single country’s debt stock to 33%, from a 25% limit previously. Draghi reiterated his commitment to €60 bln in asset purchases per month through September 2016, “or beyond, if necessary.”

In a Bloomberg article, two Morgan Stanley portfolio managers suggest global central banks are engaged in a game of chess, with all roads leading “competitive currency devaluations.” In other words, a global currency war.

In this game, central banks compete against each other by easing monetary policies in an attempt to meet their domestic, inflation-targeting mandates. Lack of coordination among central banks may mean that monetary policy remains lower for longer, leading to a semi-permanent low-yielding environment. At the end of the Global Chess Game, we are likely left with more central bank money, higher asset prices, low inflation and low yields. — Morgan Stanley Investment Management

It’s a vicious cycle with no escape, unless you want to import deflation, which no central bank wants to do. In fact, central banks fear deflation above all else, and there are already considerable negative price risks evident.

Which begs the question: Is the Fed prepared to start importing deflation with inflation still well below target and the dollar just 4% off its 12½-year high? I doubt it . . .