"Super Mario" Draghi pulled out the bazooka, lowered three key interest rates and increased his bond-buying program, which in turn helped ease the investment-grade credit default swap market. It was all risk on for the 90 minutes following the statement until he opened his mouth. He followed this large-scoped move with a comment that left investors feeling he was done and no more was going to be necessary to get growth in Europe.
I think he is delusional, but after tumbling 1.2% to a six-week low on the headline, the euro reversed and is close to 1.7% higher and gold has followed this move in lock step. Furthering negative interest rates from -0.3 to -0.4 may have just been a token move, but it is not helping the economy and will not help the recovery in European commercial banks, which is also benefiting the gold rally. Both Deutsche Bank (DB) and Societe General, which rallied on the news of expanded QE, are 10% off their highs for the day as negative interest rates are going to weigh on their growth prospects.
So, as we have been saying, the combination of the European banks still under a storm cloud, the ECB maintaining negative interest rates to try to hold the single currency together (even though it has been unable to stimulate growth or inflation), and a surprising short-covering rally in the euro have led to renewed interest in gold. That said, it may be better to play gold through options, as an outright position may have had you stopped out when we breached the $1,250 support to $1,237 at 8 a.m. ET. New Gold (NGD) is one of the gold producers that is taking advantage of the rally, hedging its entire 2016 production guaranteeing a floor of $1,200, which will provide positive cash flow for its Rainy River project in Ontario.
The length in the gold market remains a major stumbling block for the price to break through to reach the now-called-for levels of $1,400, but unless the Fed rhetoric gets more aggressive as a result of a pause in dollar strength, gold should continue to build a good base in the $1,250-$1,300 range. I do not know if it is chicken/egg, but gold outperforming oil remains a bearish signal for equities.
Base metals are trading lower in a tight range, with producer activity picking up in copper, causing the forward curve to tighten. There continues to be producer activity in aluminum, with the put skew trading over calls, although it is only the Middle East producers that are able to make money at current prices. Spot iron prices remain elevated, but the forward curve is backwardating further on producer activity. I expect the tightness in the front of the curve to ease shortly and with cal 17 trading sub $40, spot should easily fall back below $50.
