ECB Preview: A Trapped Mario Draghi Makes A Decision

After a barrage of media trial balloons (as recently as today) meant to temper the enthusiasm of Euro bulls now that the EURUSD is back to 1.20 and threatening European corporate profitability, Mario Draghi’s Sintra hawkishness is a distant memory.

And so, with the ECB’s policy decision less than 12 hours from now, a “trapped” Mario Draghi finds himself in a quandary: with less than 4 month left until the formal expiration of the ECB’s €2.3 trillion QE program, he will likely start laying the groundwork for the central bank’s stimulus reduction – after all the ECB is rapidly running out of bonds to purchase – but without revealing too much as that will send the EUR surging, and he will also hold off on any major commitment, as an explicit backing off his recent hawkishness could collapse the EUR and send Bunds right back into NIRPatory.

Which path will he take?

With that in mind, courtesy of RanSquawk, here is a full preview of what to expect (or not) from the ECB president tomorrow.

Rate Decision due at 1245BST/0645CDT and Press Conference at 1330BST/0730CDT

  • All rates and the current pace of asset purchases are expected to be left unchanged
  • Staff will update macroeconomic projections; impact of EUR likely to weigh on inflation outlook
  • Key focus for press conference will be on recent EUR strength and possible QE exit
  • Click here for a link to an overview of ECB rhetoric since the last meeting


  • DEPOSIT RATE: Forecast to remain unchanged at -0.40%. The rate was last adjusted in March 2016, when it was cut by 10bps.
  • REFI RATE: Forecast to remain unchanged at 0.00%. The rate was last adjusted in March 2016, when it was cut by 5bps.
  • MARGINAL RATE: Forecast to remain unchanged at 0.25%. The rate was last adjusted in March 2016, when it was cut by 5bps.
  • ASSET PURCHASES: Forecast to maintain the pace of asset purchases at EUR 60bln per month until December 2017. Last December, the ECB reduced the size of purchases by EUR 20bln per month, and extended the purchase horizon by nine months.



  • RATES: “The Governing Council continues to expect the key ECB interest rates to remain at present levels for an extended period of time, and well past the horizon of the net asset purchases.” (ECB statement, 20/Jul)
  • ASSET PURCHASES: “Net asset purchases, at the current monthly pace of €60 billion, are intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.” (ECB statement, 20/Jul)
  • GROWTH: “The risks to the growth outlook are broadly balanced.” (ECB statement, 20/Jul)
  • INFLATION: “While the ongoing economic expansion provides confidence that inflation will gradually head to levels in line with our inflation aim, it has yet to translate into stronger inflation dynamics. Headline inflation is dampened by the weakness in energy prices. Moreover, measures of underlying inflation remain overall at subdued levels. Therefore, a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up and support headline inflation developments in the medium term.” (ECB statement, 20/Jul)
  • RATES: No adjustments expected
  • ASSET PURCHASES: Consensus is for no change expected to exact phrasing above. Commerzbank suggest ECB could add ‘or at a lower pace’ into the above statement.
  • GROWTH: No adjustments expected (although impact of firmer EUR could be reflected in latest economic projections).
  • INFLATION: No adjustments expected (although impact of firmer EUR is expected to be reflected in latest economic projections).


Given the EUR’s 13% advancement against the USD this year, a key focus of the market’s view on ECB monetary policy has been on the appreciating currency. Despite this ultimately reflecting a resurgence in the Eurozone economy, the ECB will be wary of the potential impact on the Eurozone’s inflation path. As such, markets will be looking to see if Draghi talks down the currency with recent source reports (Aug 31st) highlighting EUR is worrying a growing number of ECB policymakers, adding that EUR concerns increase chance of delay in QE decision, or a more gradual exit from asset purchases. Furthermore, the minutes from the previous meeting also highlighted concerns about overshooting and as such given Draghi’s decision to not comment on the currency at Jackson Hole, markets will be highly sensitive to any potential verbal intervention by the President. **Note that existing rhetoric states ‘the ECB does not target the exchange rate’.* *

That said, ECB’s Nowotny (Sep 1st) has warned markets not to over-dramatize EUR gains vs. USD and ECB’s Hansson (Aug 23rd) also came out and downplayed the issue last month. Despite Hansson and Nowotny being two of the more hawkish policymakers at the Bank and thus in-fitting with their stances, it highlights a lack of unanimity at the ECB.


Aside from the firmer EUR, another key source of focus for the market will be on any clues as to when the ECB could begin tapering its QE programme given recent economic developments and concerns over bond scarcity. Ultimately, consensus amongst analysts suggest that this meeting will be too early for the bank to outline its plans for tapering at this stage with October seen as a more likely platform for the ECB to provide concrete policy actions; a view back by last month’s (Aug 16th) ECB source reports that suggested the council will hold off on debating the issue until Autumn. Furthermore, the minutes from the July meeting revealed the aim to ‘gain more policy space and flexibility to adjust policy and the degree of monetary policy accommodation, if and when needed, in either direction’; thus suggesting that the central bank will continue to hold off; as highlighted by Lloyds. Commerzbank also highlight the issue of bond scarcity given the current pace of monthly purchases which could cause a headache for the bank. However, Commerzbank suggest that it is unlikely the ECB would be willing to raise the limits on purchases from individual issuers and as such scarcity will have to be addressed as part of a larger policy move.

Although no explicit announcements are expected this time round, Nordea expect the ECB to comment on the preparatory work on September 7th, subsequently hinting at a decision on October 26th. However, Pictet suggest that markets may have to wait potentially longer than October with the ECB looking to avoid a disorderly exit from policy by proceeding in a cautious manner. This would be achieved by eventually scaling down purchases (avoid explicit mentioning of tapering), no mentioning of ending asset purchases initially or referring to actions as outright monetary tightening. Although it is likely that few details will be revealed during this meeting regarding how the ECB will manage their exit from current policy, the above is worth noting if Draghi et al elude to potential announcements next month.


INFLATION: Likely to be downgraded given the appreciation of the EUR with June projections made under an assumed rate of 1.09 in 2018-2019. Nordea expect the new assumed rate to climb to 1.18 in 2018-2019 and as such, would imply lower annual inflation in 2017-19 by 0.1-0.3% points. However, Nordea also highlight that improving employment prospects in the Eurozone (which could imply higher wages) and the future oil profile could limit the extent of inflation downgrades.

REAL GDP: There is potential for 2017 growth to be upgraded given recent firm PMI data and consumer confidence, according to Nordea. However, Pictet suggest that longer-term forecasts are likely to be little changed given the possible headwinds of the firmer EUR with ING’s base case for downward revisions for 2018/19 amid FX effects.


In terms of a potential market reaction, given the focus on EUR appreciation, FX markets will be mostly centred around any potential verbal intervention by Draghi on the currency. If Draghi is overtly cautious on recent EUR strength this will likely lead to pressure on EUR, whereas, if Draghi downplays the bank’s focus on targeting the FX rate this could provide further fuel to the EUR rally. Elsewhere, the other main source of traction will be hints on when the ECB will curtail bond purchases. It is likely that Draghi won’t offer too much on this front. However, if details are provided or Draghi is forceful about a potential unveiling of details next month, this could lead to selling pressure in fixed income markets, equities and upside in EUR. Furthermore for fixed income markets, traders will also be looking out for any potential reference to the bank’s view on bond scarcity and any possible measures which could be used to counter this issue. However, such actions are unlikely to be made this time round.

Physical Gold In Vault Is “True Hedge of Last Resort” – Goldman Sachs

– Physical gold is “the true currency of the last resort” – Goldman Sachs
– “Gold is a good hedge against geopolitical risks when the event leads to a debasement of the dollar” 
– Trump and Washington risk bigger driver of gold than risks such as North Korea
– Recent events such as N. Korea only explain fraction of 2017 gold price rally
– Do not buy gold futures or ETFs rather “physical gold in a vault” [is] the “true hedge”

Editor: Mark O’Byrne

What’s increasing the demand for gold? Is it Kim Jon-Un’s calls for nuclear war? Trump’s tough tweets on government and trade and unleashing “fire and fury” on North Korea? The threat of World War III? Possibly not, according to Jeff Currie of Goldman Sachs. This is more to do with the market mechanics underlying such events.

Currie released a note arguing that gold’s strong performance of late is less to do with the current perceived risk in the geopolitical sphere and instead from the currency debasement that arises from central banks printing money.

In light of this, investors should be buying up gold. Goldman’s Currie refers to gold as the ‘geopolitical hedge of the last resort’. This is the case ‘if the geopolitical event is extreme enough that it leads to some sort of currency debasement’ and especially so ‘ if the gold price move is much sharper than the move in real rates or the dollar.’

Read on to see in exactly what form Currie believes you should be investing in gold.

It has become too easy to pin gains on geopolitics

As we have repeatedly pointed out, the gold price jumps following events such as North Korea testing missiles or Hurricane Harvey or a declaration from Trump. However these jumps are not frequently sustainable.

What is going on in the U.S. and global markets and economy which really provides long-term support for the every-strengthening gold price.

Currie writes:

“It is tempting to blame the rally in gold prices on recent events in North Korea. While these events have helped to create a bid in gold, they only explain [roughly] $15 of the more than $100 [per ounce] rally since mid-July.”

It is too easy to pin gold’s rise on geopolitical events. Instead, argues Currie, these events are only really impacting gold if they lead to ‘actual currency debasement.’

Instead, the recent rally has been down to the decline in the U.S. dollar and lower real interest rates.

Gold is the currency of the last resort

All about that (de)base 

This dynamic is captured by a negative correlation between gold prices and real interest rates. As the central bank prints more currency, the price of the currency as measured by the real interest rate declines. The lower real interest rate, in turn, reduces the opportunity cost of holding a real asset like gold, leading the market to bid up gold prices. So at the core, gold is a hedge against debasement, which is why we have termed it the “currency of last resort.” 

Bigger things to worry about than Korea

Interestingly gold’s move this year has had far more to do with President Trump than it has to do with North Korea.

Currie argues that Kim Jong-Un might only be responsible for 15% of the yellow metals’ move. 85% of the price rise can be accounted for by the fact that  the Trump risk premium is reflected in both real interest rates and a weaker US dollar.

This does not mean that gold will no longer be classed as a hedge against geopolitical risk (as well as currency debasement). But, in the current climate gold is reacting more to Trump risk and the ongoing devaluation of monetary assets.

We find that gold can effectively hedge against geopolitical risk if the geopolitical event is extreme enough that it leads to some sort of currency debasement, and especially if the gold price move is much sharper than the move in real rates or the dollar. For these events, gold essentially serves as a call option and can therefore be thought of as a “geopolitical hedge of last resort.” For example, gold served as an effective hedge after the events of September 11, 2001 when the US Federal Reserve substantially increased dollar liquidity, debasing the US dollar. Gold also proved an effective hedge during the Gulf Wars as governments printed money.

Learn from Lehman

In conclusion, gold is still very much as we have argued – a hedge against geopolitical risk and currency debasement.

Investors must consider gold-market liquidity when using gold to protect themselves. Goldman Sachs argue that liquidity in the gold market is

crucial when deciding to hedge via physical gold in a vault versus COMEX gold futures.

Investors should not assume that during a geopolitical event liquidity will not be a problem:

Using a gold futures contract as the basis of the hedge makes the implicit assumption that market liquidity will not be a problem in the realization of a geopolitical event.

Goldman Sachs strongly advise that investors buy physical gold as opposed to ETFs or Comex Futures. Their logic for this? The liquidity event that was the collapse of Lehman Brothers.

The importance of liquidity was tested during the collapse of Lehman Brothers in September 2008. Gold prices declined sharply as both traded volumes and open interest on the exchange plunged. After this liquidity event, investors became more conscious of the physical vs. futures market distinction and began to demand more physical gold or physically-backed ETFs as a hedge against black-swan events.

Therefore owning physical gold bullion coins and bars in the safest vaults in the world will again be the primary way to protect yourself and your wealth in the event of a geopolitical crisis and liquidity crunch.

“The lesson learned was that if gold liquidity dries up along with the broader market’s, so does your hedge—unless it is physical gold in a vault, the true “hedge of last resort.”

Gold and Silver Bullion – News and Commentary

Gold up for fifth straight day as geopolitical concerns persist (Reuters)

Asian Stocks Fall as North Korea Worries Persist (Bloomberg)

Gold Outshines Bitcoin After N. Korea Bomb Test & China ICO Ban (Barrons)

U.S. stocks pummeled by policy uncertainty, North Korea tensions (Marketwatch )

Fed governor urges central bank to pretend there’s no inflation (Reuters)

Source: BofA Via

Gold is a currency debasement hedge of last resort – Goldman (Yahoo Finance)

Goldman Issues Two Different Price Targets On Gold In The Same Day (Zerohedge)

Commentary: I’m not buying gold until this happens (CNBC)

Paris Hilton, the China crypto crackdown… and the worst way to buy bitcoin (Stansberry C.H.)

BofA: Even The Bubbles Are Becoming More “Bubbly” Thanks To Central Banks (Zerohedge )

Gold Prices (LBMA AM)

06 Sep: USD 1,340.15, GBP 1,028.03 & EUR 1,122.11 per ounce
05 Sep: USD 1,331.15, GBP 1,029.51 & EUR 1,120.43 per ounce
04 Sep: USD 1,334.60, GBP 1,030.98 & EUR 1,120.53 per ounce
01 Sep: USD 1,318.40, GBP 1,020.18 & EUR 1,107.98 per ounce
31 Aug: USD 1,305.80, GBP 1,013.17 & EUR 1,098.31 per ounce
30 Aug: USD 1,310.60, GBP 1,014.93 & EUR 1,096.71 per ounce
29 Aug: USD 1,323.40, GBP 1,020.34 & EUR 1,097.36 per ounce

Silver Prices (LBMA)

06 Sep: USD 17.77, GBP 13.62 & EUR 14.90 per ounce
05 Sep: USD 17.88, GBP 13.80 & EUR 15.03 per ounce
04 Sep: USD 17.80, GBP 13.75 & EUR 14.95 per ounce
01 Sep: USD 17.50, GBP 13.53 & EUR 14.69 per ounce
31 Aug: USD 17.34, GBP 13.47 & EUR 14.62 per ounce
30 Aug: USD 17.44, GBP 13.49 & EUR 14.60 per ounce
29 Aug: USD 17.60, GBP 13.59 & EUR 14.62 per ounce

Recent Market Updates

– Bitcoin Falls 20% as Mobius and Chinese Regulators Warn
– Gold Surges To $1338 as U.S. Warns of ‘Massive’ Military Response
– 4 Reasons Why “Gold Has Entered A New Bull Market” – Schroders
– Gold Reset To $10,000/oz Coming “By January 1, 2018” – Rickards
– Gold Surges 2.6% After Jackson Hole and N. Korean Missile
– Diversify Into Gold On U.S. “Political Instability” Advise Blackrock
– Trump Presidency Is Over – Bannon Is Right
– The Truth About Bundesbank Repatriation of Gold From U.S.
– Cyberwar Risk – Was U.S. Navy Victim Of Hacking?
– Global Financial Crisis 10 Years On: Gold Rises 100% from $650 to $1,300
– Mnuchin: I Assume Fort Knox Gold Is Still There
– Buffett Sees Market Crash Coming? His Cash Speaks Louder Than Words
– Gold, Silver Consolidate On Last Weeks Gains, Palladium Surges 36% YTD To 16 Year High

Important Guides

For your perusal, below are our most popular guides in 2017:

Essential Guide To Storing Gold In Switzerland

Essential Guide To Storing Gold In Singapore

Essential Guide to Tax Free Gold Sovereigns (UK)

Please share our research with family, friends and colleagues who you think would benefit from being informed by it.

Ohio Reporter Shot Without Warning For Photographing Routine Traffic Stop

In one of the more bizarre stories to hit national news this week, an Ohio sheriff's deputy is under investigation for shooting a local reporter who innocently set up a camera and tripod on a public sidewalk to document a routine traffic stop. What's more is the shooting took place in a small town where "everyone knows everybody" and the police officer and victim were actually friends.

Ohio based New Carlisle News reports that its own photographer was shot in the incident which occurred Monday night:

Andy Grimm was shot by a Clark County deputy Monday evening. Andy had left the office around 10:00 p.m. to take pictures of lightning. There was a traffic stop on Main Street near Studebaker’s Restaurant, but Andy was not the subject of the stop. He had his camera and tripod in his hands and Deputy Jake Shaw apparently mistook it for a weapon and fired, striking Andy in the side. He was rushed to Miami Valley Hospital for surgery. He is expected to recover from his wounds.

Image source: New Carlisle News

Body camera video released by the Clark County Sheriff's Office shows Deputy Jake Shaw shoot Grimm. The shooting sequence begins at 3:20 in as the officer is checking info inside the police car on speeder he pulls over.

In an unexpected twist, the wounded cameraman is now pleading for the officer to keep his job. Grimm told local reporters, "I know Jake. I like Jake. I don't want him to lose his job over this," in reference to the sheriff's deputy that shot him.

The victim's father, Dale Grimm, told The Washington Post that his son "got out, parked under a light in plain view of the deputy, with a press pass around his neck. He was setting up his camera, and he heard pops." Sheriff's deputy Jake Shaw reportedly gave no warning before firing.

The case has been turned over to the the Ohio state attorney general’s Bureau of Criminal Division. While it's entirely possible that there's much more here than what's being reported – for example, there could have been some kind of personal dispute between the friends – the strange incident is part of a growing list of "shoot first, ask questions later" incidents which display an increasingly militarized and trigger-happy mentality by local and state police.

As we reported last week in The Alarming Militarization of American Police, it is deeply disturbing that the federal government currently seeks to pass on military hardware to local and state authorities which continue to display lack of judgement as well as over the top tactics while dealing with routine local civilian matters. Local police forces should never operate like the Pentagon, but it appears we're headed down precisely that path:

President Donald Trump has signed an executive order clearing the way for local police in America to receive military gear such as grenade launchers, high-calibre weapons, and armored vehicles. Trump and the DOJ have just reversed former President Barack Obama’s restrictions that allows local police departments to receive surplus military equipment.


…Let’s not kid ourselves, America by the day is turning into a police state where power through police force is the objective. The citizens of the police state may experience restrictions on social or financial mobility, or even on their freedom to express or communicate alternative political views.

No, the sheriff's deputy who possibly mistook a simple camera and tripod on a small-town street for a mounted assault rifle should not keep his job – he is an absolute danger to society. But could we imagine if such police made regular use of mounted 50-caliber machine guns and grenade launchers?