The price of gold has stubbornly remained near record highs even while the U.S. dollar appears to have halted its downward trend. While dollar bears have become more vocal, the greenback is trading higher today versus most major currencies than it was six weeks ago. Although the price of gold has resisted correcting, the headwinds from a weaker stock market and a stronger dollar are manifesting themselves on the last trading day of this week. Gold has risen roughly $100 in November, or 9.5%.
Policy makers as well as the investment community find themselves in an unprecedented period of uncertainty. The multitude of both fiscal and monetary initiatives being implemented is a grand experiment – and the risks of unintended side effects are growing. Bill Gross of Pacific Investment Management warned yesterday that new asset bubbles will form and create “systemic risk” with interest rates at current levels. Gross penned in his most recent letter that investors are being “forced or enticed” to purchase riskier assets as the return on their cash has evaporated. Equity markets retreated yesterday with the S&P 500 dropping 1.3%. The gold price and gold mining stocks have displayed a high correlation with the broader stock market and the possibility of a deeper correction that results in a more aggressive unwinding of dollar carry trades represents a risk to the sector.
In spite of short-term headwinds facing gold , the long-term backdrop continues to remain positive and recent political developments may add further fuel to gold’s bull market. The U.S. House of Representatives is closer to passing a proposal – to be included in the broader financial regulation initiative – that would give Congress more oversight authority over the Federal Reserve. The Financial Services Committee voted, over the objections of Chairman Ben Bernanke, to include an amendment that would allow a congressional policy committee to audit the Fed. The Financial Services Committee will attach the amendment to the financial regulation bill in spite of concerns that a less independent Federal Reserve will further politicize interest rate decisions.
The implications have the potential to be inflationary, and bullish for the gold price, as politicizing the Fed almost guarantees a permanently loose monetary policy. As Niall Ferguson penned in his recent book, The Ascent of Money, “Inflation is a monetary phenomenon, as Milton Friedman said. But hyperinflation is always and everywhere a political phenomenon, in the sense that it cannot occur without a fundamental malfunction of a country’s political economy.”
Sentiment towards gold is at extreme levels by a number of measures, including dollar-weighted put-call ratios, and both MBH Commodities and Marketvane bullish consensus figures. The macro-economic climate remains overwhelmingly bullish for the gold price and the shares of gold mining companies; however, to what extent this positive backdrop is priced in is an open debate.
Gold Price News provided by GoldAlert.