Today, head of the European Central Bank Mario Draghi, said in a news conference that the central bank is prepared to implement more easing next year if necessary. For now, he did not decide on additional easing (read: QE) even with inflation being half of the desired target.

In March, the European Central Bank (ECB) predicted an inflation rate of 1.0% over the year and 1.3% over 2015. During today’s press conference, Draghi said that their current year inflation forecast has been reduced from 1.3 in 2015 to 0.7%.

Consequently, the Euro gained strength, as deflation appreciates a currency. The U.S. Dollar went lower and gold went slightly higher … until Draghi said he will not be buying gold if he would be launching QE next year. And, obviously, he said so in an ironic way.

Not only politicans have been sarcastic towards gold in the last years, also investors have been ridiculing the yellow metal. That is understandable as they making lots of money in the stock market. But, as we all know, one day the tide will turn and gold bulls, if any left, will be the ones laughing.

For now, investor pessimism remains at extreme levels, as evidenced by the Gold Optix indicator (courtesy of Sentimentrader).

Gold Optimism Retracing From Extreme Levels Chart 1


The chart shows that the optimism has been at extreme levels for most of the time since this summer. The indicator is slightly retracing “as we speak”, probably driven by the huge short covering rally of Monday December 1st.

Given the recent history of this indicator, it is fair to expect a rally towards the 50 area which would coincide with a gold price rally to some key resistance level like (for instance, gold’s 200 day moving average at $1,273 which is also the low end of this year’s trading range).

Linking this back to the introduction of this article, a strengthening Euro would be a logic catalyst for gold’s short term strength. As this second chart shows, there has been an outspoken correlation between gold and the Euro since 1.5 year.

Gold Optimism Retracing From Extreme Levels - Gold vs Europe

The key question, in our mind, remains what central banks will do to get their 2% inflation rate. “Official” numbers do not reveal any inflation for the time being, even not with those trillions of currencies being created worldwide since 2009. Will gold’s next move higher be driven by inflationary measures by the central banks, will it be fear driven, will it be because of the outbreak of a global currency crisis, or will it be because of a shortage in the physical market? Nobody knows at this point, even the pundits who pretend to know. That is why we prefer to stick to studing ongoing market activity.

For now, market activity tells us that gold is not set for a huge rally unless a shortage develops in the physical market, something which we consider not very likely in the short run. Gold’s first challenge is to get back to normal levels of optimism/pessimism, avoid a breakdown, and start developing a pattern of higher highs and higher lows. That is what we believe readers should be monitoring on the charts.