The price of gold set another new record high at $1,182.75 per ounce, moving higher for the seventeenth trading day out of the last eighteen. The gold price has rallied 12.9% in November alone, rising $135.40. The topic of asset bubbles is back gracing the covers of the financial press, and the explosive move in the gold price is a manifestation of the unintended consequences of central bank attempts to stimulate the economy.
The Federal Reserve Open Market Committee (FOMC) released the minutes from its November meeting yesterday afternoon, and while no new information about the future direction of monetary policy was revealed, the fact that the commentary did not become more hawkish as asset markets continued their ascent was noteworthy. The FOMC commentary offered a mixed picture concerning the economy, emphasizing the challenges ahead while also noting recent improvements. In the final analysis, the communication remained dovish with respect to the future direction of monetary policy, including a reference to the FOMC forecast that the unemployment rate would remain “quite elevated” over the next couple of years and inflation would remain “below rates consistent over the longer run with the Federal Reserve’s objectives.” These views are consistent with Chairman Bernanke’s position that the economic environment remains challenging enough to necessitate maintaining near-zero interest rates for an extended period of time.
There is a growing chorus of analysts and investors who, given the significant improvement this year in financial markets, have called for the Federal Reserve to removed the “extended period of time” clause from its statement. However, the FOMC maintained the clause at its November meeting and has given no indication that it will be removed. Critics of the Federal Reserve, including Connecticut Senatorial Candidate, Peter Schiff, are concerned about the unintended consequences of the unprecedented policy actions of the Federal Reserve. Schiff has harped on the fact that currency debasement and the corresponding loss of purchasing power stemming from quantitative easing and money printing used for asset purchases is a policy that is doomed to failure. The minutes addressed these concerns by stating that the FOMC feels that the possibility of negative side effects from low interest rates and “excessive risk-taking in financial markets or an unanchoring of inflation expectations,” remains relatively low, but that the committee would continue to pay close attention to these risks.
In an unusual move, Chairman Bernanke, perhaps responding to pressure from foreign nations such as China, stated in a speech last week that the Federal Reserve was “closely” watching the currency markets and the Fed would “help ensure that the dollar is strong.” Usual practice is for the Fed to leave comments regarding the nation’s currency to the U.S. Treasury, but Bernanke apparently felt compelled to address the weakening dollar.
While the Fed minutes indicate the maintenance of current dovish policy for quite some time, a positive factor for the price of gold, other portions of the minutes suggested that the Federal Reserve may indeed have evidence to begin to withdraw the easy monetary policies used to combat the credit crisis. Specifically, the minutes stated that “most participants now viewed the risks to their growth forecasts as being roughly balanced rather than tilted to the downside,” which was consistent with the FOMC raising its 2009 and 2010 GDP target range. Furthermore, the minutes cited stronger than expected consumer spending on items other than autos as providing a signal for “more underlying momentum in the recovery and some chance that the step-up in spending would be sustained going forward.”
The Federal Reserve still considers deflation to be the overriding threat to the economy and with an unemployment figure above 10% it is difficult to imagine Chairman Bernanke, turning hawkish anytime soon. While some may argue this has already been priced into the market through a lower dollar and higher gold prices, the bottom line is that the macro-economic backdrop continues to favor the gold bulls.
Gold Price News provided by GoldAlert.