How Will the Euro and Gold React to the ECB's Early Rate Reductions?

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European Central Bank policymakers will likely start cutting interest rates from a record high in June. The ECB left interest rates unchanged last month but made clear that its next move will be a cut, most likely on June 6, provided wage and inflation data stay on their current, relatively benign path.

🤔 What will be the consequences of ECB rate cuts for Europe?

4 Consequences:

1. Exchange Rates: Lowering ECB interest rates could weaken the euro compared to the dollar, as the euro would be less attractive to investors due to lower yields. This could increase the value of the dollar compared to the euro.
2. Capital Markets: The difference in interest rates between the ECB and the Fed could encourage investors to shift their capital to where interest rates are higher. This could affect capital markets and cause changes in the prices of bonds, stocks, and other financial instruments.
3. Economic Growth: Lowering ECB interest rates could stimulate consumption and investment growth in the euro area, while stable Fed interest rates would keep the situation in the US unchanged. This difference in monetary policies could lead to divergent economic growth between the euro area and the US.
4. Inflation: Lower ECB interest rates could spur inflation in the euro area, while stable Fed interest rates would keep inflation in the US under control. This difference in inflationary pressures could affect global market conditions and international trade.

Inflation in the U.S.

Overall prices in the U.S. have risen by more than 19.5% in less than 4 years. This is an average of 5.5% per year, which has consequently erased a fifth of the purchasing power of the US dollar. For 37 consecutive months, we have not had annual inflation below 3%. Inflation is now building on the previous years of inflation. How can the US economy be labeled as a "strong" economy?

How will we curb inflation in the coming years if raw materials continue to be scarce due to new supply shortages and higher demand?

#Commodity prices have surged to their highest level in the last 13 months. The Bloomberg Commodity Spot Index, which tracks 24 energy, metal, and agricultural commodities, has risen by 9% this year. Since February, the index has increased by 11%, mainly due to global demand and supply disruptions. Copper prices have jumped 31% this year, oil prices by 11%, gold by 19%, and silver by 34%. Commodity prices continue to pressure the Fed's fight against inflation. Supply-side inflation remains a major problem.

Huge increase in capital raised in the mining sector in Canada.

Canada's largest stock exchange in Toronto is recovering thanks to mining companies raising capital as copper and gold prices have surged. We should soon start seeing extensive gold, silver, and copper drilling programs from small companies. From 2022 to a few months ago, there was hardly any drilling except by producers.

Several times in history, the precious metals industry has been considered the largest market among global assets. Today, it is at an exceptionally low level. The potential for capital to return to this industry is enormous, especially as central banks urgently try to accumulate metals, and traditional 60/40 portfolios are under pressure to redefine their capital allocation and include hard assets.

Despite the recent rise in copper prices, when adjusted for real inflation, the metal in relation to gold is trading at levels seen in the early 1990s. It is hard to believe that copper prices adjusted for gold will still be this low by the end of this decade if we continue with one of the largest infrastructure developments seen in the last 100 years.

The silver market is facing its fourth year of deficit, with this year's shortage being the second largest ever. This has led industrial users, who usually rely on miners for supply, to seek ounces by depleting major global stocks. Stocks monitored by the London Bullion Market Association (LBMA) fell to the second-lowest level ever in April. In the next two years, LBMA stocks could be depleted at the current pace of demand. We will slowly see a tightening of supply as industrial demand is expected to increase. How will investors then obtain the desired silver and at what price?

Silver officially closed above $30 last week for the first time in over a decade.

Previous rallies in 2006, 2011, and 2020 caused silver to reach a point where the price exceeded the 365-day moving average by 75%. Currently, it is at 20% of the average, so record values of $50 per ounce are not excluded in short-term.

How high will silver rise in this rally?

The average on the chart is 150.4% (measured from the low). If we exclude the 1979-80 period, short-term growth could still be 70-80%. This would mean reaching $50 per ounce.

The last time the SPX index started to decline compared to the value of silver, the price of silver increased by more than 1000% in the next 10 years.

The price per ounce of silver was around $4 per ounce in 2000, and $48.58 per ounce in 2011.

According to preliminary data, silver is trading at $35.32 per ounce on the Shanghai exchange, which is $3.32/oz above the LBMA reference price. Which price is "justified" and "credible"?

Central banks are in the midst of a gold buying spree, according to new data from the World Gold Council (WGC). The organization says that central banks added $24 billion worth of gold, weighing 290 tons, to their reserves in the first quarter of this year. This is the strongest level of net demand for any quarter on record, using data that dates back to the year 2000.

Gold has experienced a historic rise, but what happens when interest rates start to fall?

Historically, gold has seen some of its best rallies in the 24 months after the last Fed rate hike. Between 2018 and 2020, the yellow metal jumped nearly 50%, while between 2006 and 2008, it surged by 55%. In this Fed rate hike cycle, it seems the last rate hike was in July 2023. Since then, gold has jumped an incredible approximately 21% in 7 months. History suggests that more upside is coming for gold.

The breakout of gold prices within the 3rd bull trend is now evident. The 3rd bull cycle is a continuation of the 1st and 2nd cycles.

Important quote by Ray Dalio:

"If you don't own gold, you don't know either history or economics."

Do you agree?

Best regards until next time,

Peter Herman

The newsletter "Financial View Peter Herman" does not constitute an investment advisory service. Its content does not constitute recommendations for purchase or offers to purchase, but I want to inform you about important information that I personally consider important. For all advice and suggestions, I am available with an individual consultation or via email peter.herman@valores.si.