During a press conference held today, European Central Bank (ECB) President Mario Draghi announced that the interest rate on deposit facilities will be lowered by 10 basis points to -0.5% and further that the central bank is also restarting its monthly bond-purchase program. Specifically, “Net purchases will be restarted under the Governing Councils asset purchase programme (APP) at a monthly pace of €20 billion as from 1 November…The Governing Council expects them to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.” Andrew Kenningham, Chief Economist at Capital Economics, expressed concerns that it’s unclear whether it will be enough to boost European economic growth.
Yesterday, President Trump tweeted that the Fed is a collection of ‘boneheads’ who should get our interest rates down to ZERO or less. And today, the ECB’s move to cut interest rates and reinstitute a large stimulus plan quickly drew fire from the Trump Administration, when the President announced in a tweet, “European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports.” Many economists are forecasting a domestic recession by the end of next year. However, according to Chairman Powell, the Fed is more concerned about the potential for a continuing global slowdown and trade war with China that could derail the current 10-year domestic economic expansion.
If the Fed rate goes to zero, it doesn’t mean that consumers won’t have borrowing costs, banks operate for profit and would simply add fees to every service made available in the industry. It might very well result in some extremely low loan rates, but if we enter recessionary times consumers typically become far more reluctant to take out new loans. Retirees, seniors, and others depending on income from bank savings would become extremely frustrated with returns below one percent. It appears that pressure to act will continue growing, but more than likely the Fed will continue to whittle rates over time, so as to spur more borrowing and economic activity. Grass root surveys seem to anticipate five more quarter point cuts by early 2021. Switzerland took the lead earlier this week in the Interest Rate Race to the Bottom, when they posted an interest rate of -0.75%.
In line with historical precedent, gold prices held decent gains prior to and then pushed higher in response to today’s anticipated dovish announcements. A majority of analysts agree that global monetary easing policies, continued global economic slowing, and continued trade consternation with China will continue to support and promote gold prices. Regardless of recent gains, with gold more than twenty percent below its all-time high and Citibank, as recently as yesterday announcing their expectation for gold to hit $2,000 per ounce within a year or two, there may never be a better time to fortify the physical gold tranche of savings or retirement portfolios.
Although the information in this commentary has been obtained from sources believed to be reliable, American Bullion does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice. American Bullion will not be liable for any errors or omissions in this information nor for the availability of this information. All content provided on this blog is for informational purposes only and should not be used to make buy or sell decisions for any type of precious metals.