Chairman For People And Arrogant Eurocrat

June 19, 2018

Two of the most powerful men in the world. Trump? Putin? Xi? Nah. Chairman Jerome Powell and President Mario Draghi. Let’s analyze their recent press conferences!

Powell – Chairman for People

In the last edition of the Gold New Monitor, we promised that we will elaborate on the Powell’s and Draghi’s press conferences. It’s high time we fulfilled the promise.

The first thing that strikes you when watching Powell’s press conference is his style. He is more plain-spoken than Yellen, who liked academic mumbo-jumbo, or Alan Greenspan, who said he’d mastered the art of mumbling “with great incoherence.” Instead, Powell styles himself as Chairman for People who wants to improve transparency. Starting in January, the Fed will hold press conference after every policy meeting. It will give the Fed more room to raise (or cut) interest rates instead of waiting until meetings with press. It should increase the uncertainty about the timing of the Fed’s hikes.

On the other hand, the improved communication should reduce uncertainty among investors, which should be negative for the gold market. Moreover, the shift toward plain-spokenness could signal that tighter monetary policy is approaching and the Fed tries to communicate it in a way the public can understand.

Indeed, as one of the journalist noticed, the Fed is about four interest rate increases away from what might be considered a neutral fed funds rate. For years, the economy needed accommodative policy. But as the economy has strengthened, the Fed started to normalize policy:

And, you know, as I mentioned earlier, for a long time, the economy has needed accommodative monetary policy. As the economy has recovered, we've been gradually raising rates and we will -- we will be at a place relatively soon when -- again, assuming we stay on this path, when interest rates will be in the zone of what FOMC participants think is roughly neutral. And at that point, it would no longer be accurate for us to say that the Committee thinks that policy is accommodative. We know that's coming. We kind of don't think it's here yet, but it's certainly coming.

What does it mean? Well, the end of accommodative policy is coming. Brace yourself for further tightening, although very gradual. The more hawkish Fed – especially given economy being “in great shape” – should be rather negative for the gold market.

Draghi – Arrogant Eurocrat

Contrary to the plain-spoken and transparent Powell, Draghi was intentionally obscure during his press conference. When asked what does it really mean that interest rates will remain unchanged “through the summer of 2019”, he replied:

Well, the first question is really, I can only respond reading again what this means, “We expect them [key ECB interest rates] to remain at their present level at least through the summer of 2019, and in any case for as long as necessary.” Here the intention is to give a time dimension but not a precise one, for a variety of reasons. One of which is that it's both state contingent; in other words, we have to look at the general situation of the convergence process and its state.

Draghi also did not like the question about when the Europeans will be able to see rates at more normal levels. His reply was amusing:

Now, as you've seen however these policy rates being what they are, as low as they are, don't imply that what’s being claimed very often: that the savers are being deprived of their income, of their interest, because savers can well invest in other assets as well and they have done so.

What a logic! We stole your coat, but you can go to the shop and buy a fur! Of course, people adapted, but ultra low interest rates caused a rally in housing prices. Don’t you see this, Mr. Draghi?

He was also very arrogant about the euro. Asked about the Italian turmoil, Draghi told reporters that

the euro is supported, is the currency of 340 million people and has – enjoys now - a 74% support across the citizens of the euro area. And more countries want to join the euro today. You can take your conclusions, but one conclusion is that it's irreversible because it's strong, because people want it and because it is of no benefit to anybody, to discuss the [euro’s] existence.

Such Eurocrats’ arrogance is the very kindle of the populists’ anger.

Implications for Gold

Draghi sounded dovish in his press conference, but the ECB is starting its tightening nevertheless. The Fed is far more hawkish. But also more advanced in its tightening cycle. They are only four hikes from reaching the neutral level of interest rates. It could be a challenge for the Fed to lift the federal funds rate significantly above the neutral level. It implies that the divergence in monetary policies between the ECB and the Fed is likely to diminish in the medium term. It should support the euro and the gold prices. However, it does not have to come immediately, as investors prefer to be more convinced about the central banks’ stance. The effects should be visible in 2019 or even later, when the impact of U.S. accommodative fiscal policy will wane.

Arkadiusz Sieron

Sunshine Profits - Free Gold Analysis

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All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieroń is the author of Sunshine Profits’ monthly gold Market Overview report, in which he keeps subscribers up-to-date regarding key fundamental developments affecting the gold market and helps them prepare for the major changes. Arkadiusz is a certified Investment Adviser, a long-time precious metals market enthusiast and a Ph.D. candidate. He is also a Laureate of the 6th International Vernon Smith Prize.  You can reach Arkadiusz at Sunshine Profits’ contact page.

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With gold stolen by Conquistador Francisco Pizarro from the Inca Empire in 1532, Spain financed its conquest of Europe.