Jeffrey Nichols, Senior Economic Advisor to Rosland Capital comments the gold-market over the past few weeks and outlook for investors.
“Over the past few weeks, the financial market’s assessment of prospective U.S. monetary policy has continued to weigh heavily on the price of gold. It all began in mid-March when Fed Chair Janet Yellen suggested U.S. short-term interest rates might begin their next ascent in mid-2015. Contributing to expectations of higher interest rates next year has been the recent improvement in a number of U.S. economic indicators, suggesting the recovery is gathering sufficient momentum so that the Fed can continue its policy of tapering, in other words weaning the bond markets from a continuing infusion of liquidity.
As a rule, rising interest rates are a negative for gold, representing the “opportunity cost” for holding the metal . . . and although higher rates are still at least a year away, expectations alone have been enough to weigh on today’s price.
In my view, the economy remains anemic – and will continue to underperform for a very long time to come, suffering from what some economists have labeled “secular stagnation.” The household sector cannot fund a recovery in consumer spending because it remains overly indebted and underemployed while much needed government spending is politically impossible.
It will soon become apparent that the recent statistical improvement is nothing more than a bounce back from the past winter’s weather-induced economic chill. As this pessimistic view of economic prospects takes hold, the markets will re-assess expectations of Fed policy – and this should be a big plus for gold.”
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