Even after five years of the Fed’s most aggressive accommodative policy in history, there is still a lack of hoped for quality credit creation in the economy, which could be a sign that the greatest deleveraging of the U.S. economy since the Great Depression is still not complete. The Fed’s unrelenting dovish policy appears to support this concern.
The future price of gold cannot be discussed without considering its implied discount rate expressed through time-preference. This is the relative desire to own goods at an earlier date rather than later.
Immediately following the release of the Fed statement and decision, gold traded higher in the proceeding ninety minutes i.e. during Bernanke’s press conference. However as Bernanke’s time came to an end, the gold price changed direction.
Last Sunday, Sept. 15, marked the five-year anniversary of the collapse of Lehman Brothers. At that time the gold price was trading near the $900 per ounce level. I believed that to be on the high side, actually expecting gold to trade down to around $700.
The belief that gold investing will cool-off once the Fed cuts back asset purchases has its roots in the theory that says investors only buy gold as a reaction to the FOMC’s decisions. But our data shows that this is a misunderstanding.
There is some evidence in the U.K. of a pick-up in consumer spending, probably echoed elsewhere. There are two likely factors behind this, the first perhaps being seasonal, aided by the fine weather. The second is less obvious.
Western economic commentary on China and Russia is usually colored by monetarist assumptions not necessarily shared in Moscow and Beijing. For this reason, Russian and Chinese fiscal and monetary policies are misunderstood in financial markets, as well as the reasons their governments buy gold.
We all love sales and discounts when prices drop for fast food, clothing or cars. However, when it comes to mining stocks, investors look for momentum and major price rises continuing to bid up the price to overbought levels.
If global banks’ are realistically going to improve their balance sheet diversification and liquidity profiles, gold will have to be part of that process. It is ludicrous to expect banking to regain a sure footing through the increased ownership of government securities.