Europe’s newly-declared war on inflation could push aside the barrier that has been restraining the price of gold this year.
The European Central Bank (ECB) on September 8 lifted its benchmark interest rate by 75 basis points—3/4’ers of one percent—the first time it has ever taken such an aggressive move to slow inflationary pressures. It was the ECB’s second major rate hike this year, following a jump from -0.5 percent to 0 percent in July. Moreover, the ECB said it “expects to raise interest rates further, because inflation remains far too high and is likely to stay above target for an extended period.” Inflation across Europe is forecast to run at 8.1 percent this year, according to the central bank.
All this has positive implications for the price of gold. Here’s why. The U.S. Federal Reserve’s aggressive interest rate hikes have pushed up the value of the dollar, which makes gold expensive in major overseas markets, tempering demand for the precious metal. With the ECB now also boosting interest rates at an aggressive pace, the interest rate differential between the U.S. and Europe should stop growing and may eventually narrow. If that happens, the flow of funds into the U.S. dollar will slow, and the dollar should stop rising against major foreign currencies, particularly the Euro. With the dollar no longer ascending, demand for gold should increase, driving the gold price higher.
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