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How Central Banks’ Dovishness Could Shape Gold’s Outlook

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Dovish central banks

Central banks’ actions affect gold prices, both directly and indirectly. Worldwide, central banks have been making dovish statements regarding the state of the global economy. CNBC reported on June 18 that the ECB (European Central Bank) “could cut interest rates again or provide further asset purchases if inflation doesn’t reach its target.” While the ECB doesn’t have much headroom for interest rate cuts, it has other policy tools that can be used to increase stimulus.

The BOJ (Bank of Japan) also signaled on June 20 that it could ramp up stimulus as global risks cloud the economy’s outlook. BOJ governor Haruhiko Kuroda said the central bank could combine interest rate cuts with major asset buying to support the economy.

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Fed’s pivot

After cutting rates four times last year, the Fed has started talking about easing. During its June policy meeting, the Fed indicated that it’s open to interest rate cuts. India’s and Russia’s central banks have already reduced rates this month.

Banks’ dovishness is supporting gold

As gold doesn’t yield anything in terms of regular income, lower interest rates increase investors’ interest in gold and make it competitive with other assets. Lower US interest rates also diminish the dollar’s (UUP) appeal as the yields on US Treasuries (TLT) decline. Central banks’ dovishness could mean better days ahead for gold.

The SPDR Gold Shares ETF (GLD) and VanEck Vectors Gold Miners ETF (GDX) are trading 10% and 21% above their 200-day moving averages, respectively, due to the recent impetus for gold provided by central banks. Although there may be a short-term pullback in prices, central banks’ easing should keep supporting gold.

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