One big surprise in the world of gold thus far this year has been the metal’s lack of price volatility.
There was a time when any one of these developments would have been enough to send the gold price skyward. But, apparently, no longer.
Instead, the gold market seems to shrug off these developments, keeping its eyes focused on the tenor of U.S. monetary policy, particularly the prospect for interest rates.
More precisely, what the gold market is really interested in these days is the “real” or “inflation-adjusted” interest rate. Even if the Federal Reserve boosts its Fed-funds policy rate, say by a quarter percentage point, if inflation expectations rise by more, this combination spells a more expansionary (or less restrictive) monetary policy.
Taking this line of thinking a little further, business-cycle indicators – such as housing starts, employment data, consumer spending, or industrial production, for example – that point to a slower-growing economy, lead traders and investors to expect more accommodative (or less restrictive) monetary policies with lower real interest rates – and, therefore, higher gold prices.
Of course, the opposite is equally true – a stronger economy allows the Fed to raise nominal interest rates. But, so long as these higher rates are exceeded by rising inflation expectations, in actuality, lower or even negative real rates will be supportive of a arising gold price.
We have long espoused the view that the U.S. economy is caught in a long-term multi-year period of secular stagnation characterized by slower than normal economic expansion with disappointing employment and wage growth for many. Unless economic policy-makers and politicians recognize this reality, they will err of the side of excessive monetary growth with lower real interest rates – a favorable mix for gold investors but not a recipe for maximum prosperity for America.
Submitted by: Jeffrey Nichols
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