GOLD PRICE NEWS - The gold price came within $2.82 of closing at an all-time high in the spot market, as fears that the economic recovery may stall. The gold price finished at $1,254.48 per ounce, and is up 3.3% for June. The price of gold extended earlier gains after the Commerce Department revised first-quarter GDP growth downward from 3.0% to 2.7%.
The gold price has advanced 33% in the fifteen months since the liberal monetary policies called “quantitative easing” and massive stimulus programs were deployed to stabilize and restart the economy.
Gold stocks made strong gains in the session, riding the gold price wave higher and getting some mild assistance from a stock market which reversed earlier losses to close modestly higher. The Market Vectors Gold Miners ETF (GDX), rose 3.3% to close at $53.91 after hitting a high of $54.31 in earlier trading.
Despite the trillions of dollars in stimulus and central bank backing arrayed in support of the economy, it is faltering in far too many parts of the world. As stimulus-induced deficits and bloated central bank balance sheets ravage currencies around the world, investors are turning to the gold price as a currency alternative, driving the metal to fresh highs in the past week.
But central bank policy - in particular, the Federal Reserve’s zero-rate policy - is spurring the gold price in another way, too. Adrian Ash, head of research at Buillionvault.com, notes that the rate of return on cash and bonds relative to inflation - or the real interest rate - plays an equally important role in the level of the gold price.
Adjusted for inflation, the effective Fed Funds rate has been below zero for 54 of the last 101 months, matching the 54 months of below-zero rates in the 1970’s. But, Ash notes, the current rate regime is even worse for cash and bonds than it was in the 1970’s when the inflation-adjusted Fed Funds rate averaged a paltry 0.01%. Since 2002, the real Fed Funds rate has averaged negative 1.2%.
Says Ash, “Holding cash-on-deposit now guarantees a loss of real value. Retained wealth will continue to seek shelter elsewhere. Gold makes an obvious (and historic) alternative, not least with the opportunity cost - that foregone interest otherwise earned by cash savings - entirely absent.”
The policy decisions which have resulted in a persistent negative real interest rate environment are just one of many factors which continue to drive the gold price.
