GOLD PRICE NEWS - Larry Summers, the senior economic adviser to President Obama, reportedly asked Congress yesterday to begin drafting plans for a second stimulus package to prevent the economy from suffering a double dip recession. Summers suggested additional loans for small businesses, an extension of unemployment insurance, and financial aid to states to avoid further layoffs in the public education sector.
In recent months, Summers - who has a bit of a reputation for falling asleep at economic policy meetings - has made numerous public statements highlighting the strength of the economic recovery. Accordingly, it comes as somewhat of a surprise that these measures would be needed if the recovery were in fact so strong. Summers is likely talking up the economy in order to instill confidence in American consumers, while simultaneously proposing measures that keep the stimulus-driven recovery from faltering.
While these measures would likely help in the shorter-term, they come with significant longer-term consequences. Each of them would involve further government borrowing and/or money creation, two of the chief catalysts for the rise in the gold price over the past decade. Furthermore, these measures provide additional evidence that policymakers’ main enemy remains deflation - a bullish backdrop for investments tied to the price of gold.
Summers is likely well aware of the implications for the gold price, given an academic paper he wrote in 1998 with Robert Barsky titled “Gibson’s Paradox and the Gold Standard.” The two economists concluded that movements in the gold price are driven by the reciprocal of the real rate of return from the global capital markets. Per Summers and Barsky’s research, the recent investment climate of muted long-term returns in stocks and bonds, combined with the prospect of continued monetary inflation to combat the financial crisis, strengthen the case for increasing an investors’ exposure to the gold price and gold ETFs - such as the SPDR Gold Trust (GLD) - in spite of the risk associated with short-term oscillations.
