We were again disappointed. Last week, investors did not hear what they were hoping for from Mario Draghi, the ECB chief, that is, when, how and at what rate the central bank will gradually put an end to its policy of quantitative easing. “Come back in October, and then you will find out”, was Draghi´s message to a gathering of reporters and to millions of investors and traders around the world who were glued to their screens.
Although in this case the old maxim “better late than never” would apply, the outlook regarding tapering QE by the ECB does not mean that monetary policy in the Eurozone will be normalized anytime soon. Even if the ECB begins dismantling QE at the beginning of next year and even if the central bank completely puts an end to the program in the course of 2018, monetary policy will still remain very loose for the coming years.
Why is this the case? Draghi, in this sense, was very clear: the ECB will raise the official rate only after a very long while after the central bank has officially ended QE. If we take a look at the Fed and how long it took the Fed to raise interest rates for the first time after putting an end to QE, then that experience would imply an interim period of about one and a half years.
Since the ECB has only one policy target, that is, keeping inflation below but close to two percent and keeping it there in the mid to long term (read: about two years into the future), the inflation forecasts for the coming years give us a chance to estimate whether the central bank based in Frankfurt will turn its interest rate wheel anytime soon.
Of course, there exist a bunch of different inflation forecasts and, besides, which one are we supposed to use? Experience teaches that forecasts on price inflation by in-house ECB economists are more important to the ECB board than the other available forecasts.
And these forecasts tell us that inflation will amount to 1.2 percent in 2018 and to 1.5 percent in 2019, given the assumption that monetary policy will remain unchanged (there are some other additional assumptions as well, such as the oil price and the EUR/USD rate to mention a few examples). That is simply too far removed from where the ECB would like to see inflation, let’s say, at about 1.8 or 1.9 percent. In short, this second opinion seems also to strongly suggest that an initial rate hike will become reality a few years down the road at earliest or, according to the most optimistic scenario, somewhere in 2019.
But wait, that is not everything there is to say! The central bank also clearly indicated that whenever they would initiate their rate hikes, they would do so very gradually. An initial small interest rate hike and then months of waiting to see how the economy and markets react before another rate hike. Again, the Fed is a good example of what we might expect regarding the future interest rate trajectory in the Eurozone.
Since we are already discussing the Fed: it seems as if the odds that the Dutch national football team will qualify for the World Cup and then
goes on to win the World Cup (the Dutch national selection is very close to missing the World Cup) are higher than the odds of the Fed raising the official rate between now and the end of 2018 another four times. For our readers who care less about football: the Dutch team can only get to the World Cup if a soccer miracle happens and then some. Let me put it differently: it is more likely that I will win the lottery three times in a row than that the Fed will raise interest rates four more times before 2019.
All the above means that monetary policy on both sides of the Atlantic will remain expansionary for the foreseeable future. History teaches us that this generally is a period in which precious metals outperform other assets.
Of course, the performance of precious metals does not only depend on monetary policy. Geopolitics are just as important, for instance, just as political developments within the US.
It does not take much imagination to picture a scenario in which all the hassle concerning and caused by North-Korea will take a while to subside. The conflict has everything to cause at least for quite some time geopolitical tensions with a greater than negligible chance of escalating.
In the US, to summarize the current outlook as briefly as possible, it is simply a political chaos. Although the Republicans have a majority in both the White House as in Congress, they fail to take advantage of their sheer numbers. Sometimes I am inclined to think that even a resolution on recognizing the fact that it is raining outside on a day that it actually rains outside, will not pass with a simple majority that the Republicans currently hold.
This is of importance since the federal government will soon approach the debt ceiling again. To briefly summarize: in case the debt ceiling is not raised in time, then the US is heading for a technical default. For the next fiscal year, no final budget exists, while the new fiscal year starts on the first of October. Why is there no fiscal budget? You might have guessed it by now: because the Republicans, who essentially do not need any Democrats or their votes, are internally divided and are mostly busy fighting each other.
Another factor in all this, is the fact that elections are approaching rapidly at the end of next year and that, therefore, a need exists for members of Congress to begin campaigning. Whereas some Republicans win voters when perceived as a Trump-ally, there are plenty of Republican Congressmen who will actually win votes by opposing president Trump.
Persistent very expansionary and loose monetary policy in the both the US and the Eurozone, high or even increasing geopolitical tensions and the possibility of a worsening political chaos in the US … all factors which would rather push precious metals prices up than down in the coming months.