Mario Draghi made himself very clear: he is going to do everything in his power to fight off deflation. Many analysts believe that gold will play a role in this fight.
We can hear you think “yeah right, the ECB buying gold…”, but the title of this article did not fall from the sky; it is based on recent statements from a prominent member of the European Central Bank, Yves Mersch, who did not beat around the bush. The man from Luxembourg underlined that the ECB could start buying different types of assets to stimulate the economy when necessary. Not just government debt or mortgage-backed securities, but also stocks or ETFs. The Bank of Japan is already doing this today; buying into ETFs and leading Japanese companies. Mersch also pointed to other assets that fulfill a monetary role on the central bank’s balance sheet, such as gold.
Purchasing gold is not such a crazy idea for the central bank when you think about it. Contrary to the US central bank, the gold reserves of the ECB are valued at market price on its balance sheet. Coincidence or not, but the balance sheet of the ECB went downhill from the moment gold got stuck in a downtrend.
Source: ECB / Stockcharts
The two charts above – the ECB balance sheet on the left and gold (in EUR) on the right – are so similar that we started digging a bit deeper. The detailed balance sheet of the ECB, which we found on their website, clearly shows that gold carries a lot of weight compared to other assets. On a total of 597 billion euros, the value of the ECB’s gold position is 329 billion euros, which amounts to 55%. The contrast with debt securities (160 billion euros) or equity and/or investment funds (360 million euros) is huge. We annotated the table below to point out these assets on the balance sheet.
Source: ECB
According to Mario Draghi’s recent statements, the European economy has to pick up steam and to accomplish that, inflation needs a little push. A higher inflation rate is synonymous with expanding the central bank’s balance sheet, however, which is what Draghi implicitly mentioned to expect. The market presumes, however, that this balance sheet expansion will be the result of buying debt securities but, as you can see on the table above, there are other ‘line items’ that can achieve the same result, including the purchase of gold.
