Resource Investor: ECB rate cuts could have long term effect on gold (Redacted)

Source: Resource Investor

Author: Mark O'Byrne 

Yesterday’s ECB decision is actually much more important to the long term outlook for gold.

The ECB made a historic decision and became the first major central bank to take the extraordinary step of charging interest on deposits. ECB President Mario Draghi cut the deposit rate to minus 0.1% and lowered the key interest rate to a record 0.15%.

While the euro strengthened against the dollar by the end of trading, it fell against gold. This suggests the move may not have the desired effect of lowering the value of the euro. Market participants may realize competitive currency devaluations are set to continue and no major nation is, at this time, willing to see its currency appreciate versus another major trading partner.

The ECB’s move should lead to the euro further weakening against gold and increase demand for gold in Europe as investors move to hedge their euro exposure. Hard pressed savers may also allocate some of their non-yielding savings to gold.

Ultra loose monetary policies, negative interest rate policies and the possibility of the ECB printing euros to buy bonds will make the gold shorts nervous, and should contribute to a pickup in demand for gold — especially in Europe.

Gold has always been criticized due to its lack of yield, unlike stocks, bonds and deposits. However, given the ECB’s historic decision yesterday and the continuation of ultra loose monetary policies, many investors and depositors will now rightly see non-yielding gold as an increasingly attractive diversification.