ECB QE and the prospect of gold purchases One of the problems with ECB QE, as we all know, is the lack of a collective eurobond or sovereign-neutral asset to target, which would make asset purchasing less, you know, subjective vis-a-vis the assets you choose to support and those you don't. It is for this reason that analysts are divided about the type of assets Draghi may or may not be inclined to target. There is, after all, a delicate balance between targeting ETFs or real-estate trusts neutrally and buying corporate stock or housing, which can evoke the start of quasi nationalisation of the economic system, if not government favouritsation of specific sectors, corporations or industries. One way around this problem is to target all bonds in equal measure, but this runs into the problem of over-targeting assets such as German bunds which are already in short supply vis-a-vis other European bonds in the market, opening the door to liquidity problems and all sorts of unintended side-effect. Hence why talk is suddenly turning to the purchase of more neutral (domain unspecific) assets like gold. But as Melanie Debono at Capital Economics notes on Wednesday this would make just as little sense for the ECB as it would do for Switzerland (our emphasis): The price of gold has gained some support in the last few days from speculation that the ECB will include the precious metal on the list of assets to be purchased as part of a programme of full-blown (QE). But this makes little sense to us. If the aim is simply to expand the ECB's balance sheet and increase the supply of euros, buying gold might be more acceptable to those worried about the risk of hyper-inflation or the loss of fiscal discipline than buying government bonds. But there are a number of reasons why it is very unlikely. For a start, there simply isn't enough gold for the ECB's purposes. Unless the ECB is willing to become the dominant player in the gold market (and significantly increase its current holdings, it will have to look elsewhere. What's more, even if the ECB devoted just a small part of its purchases to gold, it wouldn't achieve very much. Crucially, very little of this investable gold is held by euro-zone banks. Purchasing gold in the open market or from other central banks wouldn't encourage lending or portfolio rebalancing towards riskier assets. Nor is there any obvious economic advantage in boosting the price of gold - as opposed to the prices of government bonds, asset-backed securities or even equities. And buying gold would not send such a clear signal about the outlook for monetary policy. Indeed, as Debono points out, it's a strange view for market analysts to hold given that most central bankers stand firmly against the Swiss gold proposal precisely because of the constraints such purchases would introduce to the central bank toolkit. Nevertheless, it is also true that discretionary purchases are a different kettle of fish to a legislative measure requiring a minimum 20 per cent asset holding in gold as is the Swiss proposal. Even so, Debono is absolutely right when she insists it still makes little sense. The ECB's intention, after all, is to distribute liquidity to the system in as even a way as possible so as to stimulate the economy without being accused of economic favouritism. By handing cash over to nomadic gold owners with no sovereign association, euro liquidity would either flow out of the euro-system to be held abroad in "euroeuro" accounts, or, alternatively be forced into exchange against international currencies at a depreciating rate. In short, all the measure would do is devalue the euro, and appreciate gold in euro-terms. But, not only can the same effect be achieved by depreciating the euro in outright FX interventions against strategic currencies, it can be achieved much more efficiently and substantively. At the end of the day, the ECB's key objective is to stimulate demand and spending, so as to get the economy going. That means making it as unattractive as possible to hold cash or any other asset that discourages money velocity due to that asset's perceived scarcity vis-a-vis the euro and a general assumption that its value can only appreciate in euro terms. Consequently, there is no logic at all to ECB QE if all it does is encourages a flow of capital into the sort of assets that incentivise hoarding behaviour rather than productivity-stimulating spending in the economy. That's not to say that if ECB QE happens the gold price wouldn't ascend in euro terms regardless. It's to say the ECB has little interest in encouraging it to appreciate further. Related links: Building the SNB a cross of gold (or an SWF?) - FT Alphaville One Eurobond to rule them all - FT Alphaville