Euro Gold Below Chart Support

Trading in gold has been relatively quiet in today's session ( boring would be a better word). I suspect traders on both sides do not want to get too aggressive before the outcome of the ECB meeting on Thursday is known and the monthly payrolls number is released this Friday.

The thinking at this point among the majority is that the ECB is going to provide some sort of stimulus measure. Recent inflation readings in the Eurozone and especially in Germany indicate that the bank has room to make a move along this line. The biggest concern is the lack of lending by banks ( borrowing by others). That is the same issue that had been plaguing the US economy even after the first two rounds of QE came and went. The Fed opened up the liquidity spigots but the money never made it out of Wall Street and the equity markets into the hands of the consumer in a large way. That lack of circulation through the broader economy is the reason that the Velocity of Money fell and has continued to fall.

One wonders if that ECB does unveil some sort of liquidity program whether or not that would produce the same outcome this time over in the broader Eurozone.

It seems to me that the one thing that the ECB could do, which would find broad acceptance among most of the members - and certainly among business - would be to try to knock the Euro even lower.

Keep in mind that when the Japanese government came under new management with the Abe administration, that it set about deliberately trying to weaken the Yen ( even though it denied so doing). Japan was trying to fight deflation but what they managed to do was to, in a sense, export some of that deflation to the Eurozone because the weakening Yen tended to push up the other majors at its expense.

If the ECB starts trying to take the Euro lower, who gets to import the deflation impact from its currency strengthening? That is unclear.

I guess we will all find out soon enough what the ECB is going to do this week.

For the time being, I am keeping a close eye on the gold price in terms of Euros, or Eurogold.

Here is its chart.

You can see, for the last two months ( April and May) whenever the gold price neared the 920 level, it bounced. Last week it fell through that level and has remained below it for the time being. It is still up for the year but its looks heavy.

There is some uncertainty as to what gold might do if the ECB acts. One school of thought is that if they set out to deliberately drive down the value of the Euro, it would benefit the US Dollar and thus pressure the gold market. Another train of thought goes that, depending on whether they engage in their own version of QE, it would tend to shore up the gold price as traders who fear a debauchment of the Euro would buy gold as protection against that.

I have to wonder whether or not the ECB would be any more successful than the US Federal Reserve however when it comes to producing inflation. Central Banks can lower interest rates until the cows come home but they cannot make consumers or even business for that matter, go out and borrow. To take on new debt, individuals have to feel comfortable enough or confident enough, that they can handle the additional debt load. The labor markets, I believe, have more sway over the inflation issue at this point in the game than any other area of economic interest. That is true whether it be in the Eurozone, here in the US or over in Japan.

The key in my mind, at least as it regards gold, is whether these Central Banks efforts can seriously fan the flames of inflation or whether their policies are more or less acting to produce a type of standoff between inflationary forces that they want to set loose and the deflationary forces from large levels of debt and stagnant or moribund labor markets.

Based on the price action in the bond markets, and especially the action of the TIPS spread, the market is looking ahead and seeing a period of slow but stable growth without any strong inflationary pressures. That is what we have had for the last couple of years in particular and why stocks have done so well and why gold has fared so poorly.

Something would need to change on that front to alter the current sentiment.

Interest rates have perked up a bit here in the US with the yield on the Ten Year back above the 2.5 level. It is currently sitting at 2.588, up from 2.438 last Tuesday.

Here is a quick look at the broader commodity sector using the Goldman Sachs Commodity Index.

It has fallen to the same level from which it bounced last month in May. It still is showing no signs of any upward acceleration however.

One of the reasons that this index is thus far refusing to break down is on account of the strength that continues in crude oil. Large hedge funds have huge long positions in that market and have refused to sell those down and that is keeping this market supported even in the face of some sizeable stocks in storage. As I have said before, crude is a mystery to me because I cannot fathom how much of this hedge fund buying is related to their wanting to own the stuff as an asset class into which they can diversify or how much is due to a general perception that the US economy is very slowly improving with a corresponding increase in demand.

I watch both copper and crude very closely in this regard and their chart pattern over the last of week or so has been remarkably similar. both remain supported but have been unable to extend higher. That might change at any time but for now, neither are giving any clues as to what direction they expect the global/US economy to move in.