Gold Falls Below $1,300 After Powell’s Testimony: What To Expect From The ECB Meeting?

Powell’s testimony before the Congress is behind us. The ECB meeting is ahead of us. Will Draghi support the gold prices after recent declines?

Gold Falls Below $1,300

Gold bulls might be disappointed. The upward trend apparently ended. As one can see in the chart below, gold fell below $1,300 on Friday.

Chart 1: Gold prices from March 1 to March 4, 2019

The decline surprised many people. However, we are not moved, as the previous gains looked a little too bold. As we reported on Thursday, notwithstanding the renewed conflict over Kashmir and Cohen’s testimony, gold declined last week. Typically, when the yellow metal fails to jump – even for a while – after bullish news which should increase the safe-haven demand, this is a bearish signal.

What happened?  Well, the analysts focused on the trade wars. On Sunday, the Wall Street Journal reported that the U.S. and China are close to finalizing a trade agreement. In particular, the media report that both China and the United States pledged to roll back tariffs currently imposed on $350 billion worth of goods. These revelations triggered a risk-on sentiment, exerting a downward pressure on gold prices. This is what we warned against last week. On February 26, we wrote in Gold News Monitor:

Thus, gold bulls should welcome all positive news about the trade deal. Unless, they will be too positive and spur too strong risk-appetite which is usually negative for safe-havens assets.

That “unless” was really in place. You see, we still believe that a trade deal may be negative for the US dollar (after all, the trade tensions were positive for the greenback) in the medium-term. However, what matters in the short-term is that the uncertainty about the US trade policy is gone from the market. So, we have seen a relief rally in the risky asset markets, to the detriment of gold.

Will Powell and Draghi Support Gold Prices?

However, we should not forget about the monetary policy. After all, the gold prices started to decline before the Wall Street Journal’s report on possibly resolution of the trade tensions between the US and China.

Last week, Powell testified before the Congress. So maybe it shed new light on the Fed’s stance? Not really. The Chairman reiterated that the Fed could be patient, or that it is in “no rush to make a judgment” about further changes to interest rates. However, Powell offered some details about the Fed’s balance sheet policy. He confirmed that the US central bank will stop shrinking its balance sheet later this year; and he also said that the process would leave the balance sheet at about 16-17 percent of GDP, or at around $3.2-3.4 trillion:

We’ve worked out, I think, the framework of a plan that we hope to be able to announce soon that will light the way all the way to the end of balance sheet normalization (…) We going to be in a position ... to stop runoff later this year.

However, these details should not move the gold market significantly, as investors have already priced in the quicker normalization of the Fed’s balance sheet. What is important here however, is that the view that the Fed has made recently a U-turn might be exaggerated. The pause in hiking is not the same as a U-turn. The stock market calmed down, so we could see a return to a more hawkish policy later this year. After all, the GDP ended up at 2.9 percent in 2018, matching 2015 as the biggest increase since the Great Recession. In 2019, the US economy slowed down, but it remains on solid footing.

Another important factor for the gold market right now is the ECB’s monetary policy. As a reminder, the ECB holds meeting on Thursday – and investors extend bets that Draghi will turn out to be more dovish. Such expectations strengthen the US dollar against the euro – and gold. Indeed, although the Fed has recently paused, the divergence in monetary policies between the US and other major economies is still large. And the gap between bond yields in America and Germany has actually widened recently. However, with so much dovishness priced in before the ECB meeting, Draghi may fail to beat market expectations, which should help the euro and gold.