As the ECB targets Parity with the Dollar, Where will Gold be in 2016?

The current inflation figures for the ECB (European Central Bank) are languishing far below its target of 2% inflation. Quantitative easing in the past has been unable to lift inflation above the current 0.3% level. The ECB’s President Mario Draghi to begin the discussion of further QE (quantitative easing) to stimulate prices in the region. The question here is, will further quantitative easing from the ECB lift gold prices as it did in the past, or will the potential tightening of the economy by the Federal Reserve push gold lower?

Quantitative easing during 2009 and 2011 pulled up gold prices as seen in the chart above. As the yields typically remained more depressed due to previous quantitative easing, later easing was not concentrated on the yields, and thus didn’t pull gold prices any higher. Instead, prices dipped.

As the ECB will opt for further QE, the euro will likely lose ground against the US dollar. The potential loss of the euro and strengthening dollar—from the likely Fed rate hike in December—will have a ripple effect on gold, pushing in further down. Gold fell around $100 since mid-October when the Fed signaled that it would lift rates in December. The current bearish sentiment in gold is also extended to ETFs like the SPDR Gold Shares (GLD) and the Sprott Gold Miners ETF (SGDM). Further in 2016, the market sentiment continues to be bearish, as the Fed’s effect will most likely take over the ECB’s effect.

The bearish sentiment in gold has also spread to mining companies like IamGold (IAG), Eldorado Gold (EGO), and Gold Fields (GFI). These three companies together contribute almost 8% to the price changes in the Market Vectors Gold Miners ETF (GDX). The GDX indicator has lost about 32% of its share price on a year-to-date basis.