The gold price has stubbornly held near record highs in spite of calls for the price of gold to decline amidst a U.S. dollar that 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. The gold price has resisted correcting further to this point, but the headwinds from a weaker stock market and a stronger dollar are manifesting themselves on the last trading day of this week. The gold price has risen roughly $100 in November, or 9.5%, while the Market Vectors Gold Mining ETF (GDX) has climbed 20.6%. Gold mining stocks were up yesterday and the gold price was flat - a remarkable display of relative strength with the stock market weak and the U.S. dollar strong.
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% as risk appetites receded. 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 the gold price, 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. With Congress known for catering to the special interests of their constituents, giving them the ability to interfere in monetary policy may cause a more vocal and aggressive thrust for looser monetary policies.
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 the gold price 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.
