GOLD PRICE NEWS - The gold price rose $13.03 to $1,210.22 per ounce Friday following the release of the June employment report. In spite of its rough start to the third quarter, the gold price remains higher by 10.5% in 2010. As risk aversion has re-emerged in the financial markets, gold has been one of the few assets to provide a store of value thus far this year. The stellar performance of the gold price compares to the 7.4% year-to-date decline in the Dow Jones Industrial Average (DJIA), which was lower by 77.61 points, or 0.8%, at 9,654.92 in afternoon trading.
While the DJIA has hovered near the 10,000 level for over ten years, the gold price is on track for its tenth consecutive year of gains in large part due to the economic policies emanating from Washington, D.C. In response to the financial crisis, the federal government and Federal Reserve implemented an unprecedented amount of fiscal and monetary stimulus. While these measures were aimed at preventing deflation from taking hold, they indirectly helped push the gold price to new highs.
In an analysis of these policies, Allan Meltzer, author and professor of economics at Carnegie Mellon University, wrote an op-ed in the Wall Street Journal titled “Why Obamanomics Has Failed.” Meltzer highlighted the first mistake of the administration was the lack of foresight by President Obama and his team of economic advisors to understand the longer term consequences of their actions. Secondly, measures by Congress have added to the uncertainty the American people feel about their economic future. While he does not address the gold price in his piece, its rise is a symptom of the current economic malaise. Gold prices continue to rise as confidence in the U.S. dollar, and the entire international monetary system, wanes.
Meltzer noted that by relieving state and local governments of their budgets, they have merely transferred them to the federal government. Deficits and debts have exploded and politicians and central bankers have responded with easy fiscal and monetary policies, which have merely compounded the debt bubble. The gold price has risen to over $1,200 per ounce in response to the fiscal and monetary irresponsibility.
While Meltzer did agree with the President’s assertion during the 2010 State of the Union address that the U.S. must increase exports, he claimed Obama has done little to help “either by encouraging investment to increase productivity, or by supporting trade agreements.” Meltzer went on to propose a plan that takes into account the long term future of the economy while continuing to chip away at the growing deficit. He wrote that “Successful leaders give the public reason to believe that they have a long-term program to bring a better tomorrow. Let’s plan our way out of our explosive deficits and our hesitant and jobless recovery by reducing uncertainty and encouraging growth.” Once the American people can overcome their uncertainty, expectations about the future will improve, and a true recovery can begin.
While Meltzer’s argument emphasizes the need for fiscal prudence and clarity from Washington, the recent actions of the federal government do not suggest that they are taking his suggestions to heart. The clearest example of this is the fact that on January 1, 2011, the largest tax increases in the history of the United States are scheduled to take effect. Higher taxes will only compound the problems for consumers and small businesses, making any chance of a sustainable recovery far less probable. These policies will therefore create further challenges and uncertainty - an environment where few items outside of the gold price are likely to shine.
