GOLD PRICE NEWS - The gold price fell $2.97 to $1,233.74 Thursday morning as the price of gold continued to weigh the impact of the latest Fed decision on monetary policy. After the gold price dropped as much as $16 to $1,225 yesterday, the price of gold rebounded to $1,236 following the Federal Open Market Committee (FOMC) policy statement that the U.S. central bank would maintain interest rates near zero for an “extended period” of time.
In large part because of the Fed’s continued dovish view, the gold price remains higher by 1.6% in June and 12.6% year-to-date. The SPDR Gold Trust (GLD), which serves as a proxy for the price of gold and is the largest gold ETF, has posted a monthly and annual gain of 1.7% and 12.7%, respectively.
In its policy statement the Federal Reserve once again noted that inflation is “likely to remain subdued, for some time,” implying that deflation risks remain the primary threat to the economy. Echoing this sentiment earlier this week was Paul Krugman, the Nobel Prize winning economist and Princeton University professor. While speaking at an economic conference in Tel Aviv, Krugman noted that inflation is of no real threat to the economy and that the world economy needs more stimulus in spite of growing concern over rising debt levels in the public and private sector. He stated that “the crisis is not behind us if we look at what matters most - jobs.” Moreover, he warned that “a period of deflation, or a general decline in prices, is possible within the next few years.”
While Krugman supported the policies of the Federal Reserve, he criticized European governments for focusing more on reducing deficits than stimulating growth. Amid growing concern over the sovereign debt crisis in Europe, governments across Europe have begun to reduce spending as well as implement tighter monetary policy, which is likely to slow growth. Krugman disagreed with this strategy, saying “Now is the time when we really need the government support. Unfortunately, pulling back is what seems to be happening.”
During the question-and-answer portion of the conference, Krugman stated that “On the inflation side, the Germans do worry a lot about inflation and basically that’s because they’re crazy. It’s just not going to happen with a massively depressed economy.”
Krugman’s views appear to align with Fed Chairman Ben Bernanke, who has stated throughout the past year that the economy continues to require considerable support from the public sector. While the policy measures advocated by Krugman have benefited the economy in the shorter-term, they come with significant unintended consequences - including the rising gold price and the reduced marginal impact on GDP growth of each U.S. dollar created out of thin air. The ascent in the price of gold is representative of the rampant currency debasement ongoing around the world. And based on yesterday’s Fed statement reiterating its commitment to fighting deflation, the outlook for the gold price continues to be favorable.
