ECB ‘Bazooka’ Extended – Will Buy EUR 60 Billion Per Month Until At Least December 2017

The ECB’s ‘Bazooka’ is back and ‘Super Mario’, the European Central Bank’s monetary magician did not disappoint QE addicted markets yesterday by extending ultra loose monetary policies and quantitative easing until at least December 2017.

The euro fell and gold rose 1.1% in euro terms from €1,090/oz to €1,102.85. Stocks globally moved higher, and European stocks look set for their best week since February, supported by the extended ECB currency printing and a calm, some would say complacent and irrationally exuberant, reaction to the Italian referendum.

Despite the recent sell off in gold, it remains 13% higher in euro terms in 2016 –  10% higher in dollars and 30% higher in pounds.

Gold in EUR (YTD 2016)

The ECB somewhat surprised markets by extending its bond-buying ‘stimulus,’ but at a lesser amount – reduced from €80 billion to €60 billion. The ECB tapered despite Mario Draghi categorically insisting that there was “no question” of ECB tapering.

The decision helped send Wall Street to fresh record all time highs, as investors decided the ECB was signaling an extended period of even looser monetary policy. Draghi had previously signaled that QE would continue until next September.

However, the ECB warned that if the outlook becomes less favourable they will increase their bond buying programme. They said that may increase the size and duration of the programme if needed.

Given the scale of the political, economic and systemic challenges facing the EU – including the coming Dutch, German and French general elections – this seems likely.

Although, not if the voice of monetary prudence has its way. The German Bundesbank chief Jens Weidmann voiced concerns. The president of the Bundesbank did not agree with the decision to extend its bond purchases according to German newspapers.

Weidmann had warned on Monday that central banks shouldn’t use easy-money policies to fight debt crises or rising populism, signaling he would resist any policy change from the ECB.

Weidmann’s comments were largely ignored but according to the Wall Street Journal:

Mr. Weidmann said the decision should be based exclusively on the outlook for inflation and not on political considerations, such as easing the pressure on governments.

“If a central bank keeps jumping into the breach for politicians or even trying to influence the democratic process, that leads to a politicization that endangers its independence,” he said

Italian banks are on the verge of collapse. Banks in Italy have a massive €360 billion of non-performing loans, equivalent to more than a fifth of the country’s GDP.

The “EU maths” simply do not add up.

Super Mario’s QE of €60 billion a month would be exhausted in dealing with the bad loans in Italy alone in just 6 months. Meanwhile, there continue to be major financial challenges in many banks throughout the EU including in Germany with Deutsche Bank.

In September, Draghi “refused to answer questions” regarding Deutsche Bank during a closed-door meeting in the German parliament.

ECB President – aka ‘Super Mario’

The life support mechanism of QE has not helped the economies of the many sick patients of Europe, the unfairly named ‘PIIGS’, get to a position of having healthy banking systems and sustainable economic growth.

Rather the ECB has simply prolonged the stay of execution for the patients. The primary solution to the crisis remains debt forgiveness on a massive scale and the reorganisation of the financial and banking system.

Gold is again set to act as a safe haven for Italian and other Europeans and a hedge against bank failure and the significant, cyber, systemic and monetary risk of today.

The ECB has itself acknowledged that gold is a safe haven asset and an important monetary asset. Mario Draghi said of gold in October 2013 that gold is a “reserve of safety.”

Draghi told an open forum at Harvard’s Kennedy School of Government, why central banks want gold and what value it offers. He said that there were “several reasons”to own gold including “risk diversification”.

As we enter 2017, diversification and having an allocation to physical gold has never been more important for investors in the EU, UK, U.S. and throughout the world.