GOLD PRICE NEWS - The gold price closed higher by $5.50 at $1,168.75 per ounce, trading in a narrow range for the last two sessions after the price of gold plummeted $21 earlier in the week. The gold price is now 7.6% off its all-time high reached in mid-June, when the price of gold hit $1,265.
The fall in the gold price has gone hand-in-hand with redemptions of physical gold in exchange traded funds like the SPDR Gold Trust (GLD). Yesterday, redemptions of physical gold from the GLD totaled $700 million, the largest single-day outflow of bullion in over two years and the third-largest outflow since the GLDs inception in late 2004. Total GLD outflows for the month of July now amount to $1.4 billion.
A similar flight from the gold price has occurred in the gold futures market. COMEX non-commercial short positions -speculative positions betting on a fall in the gold price – nearly doubled from the previous week to 120 tonnes, while non-commercial long positions plunged 62 tonnes to 758 tonnes. Net long non-commercial positions fell to 25.5% of open interest last week, the lowest percentage since November 2008.
While the gold price was flat early in the session, the price of gold began to edge higher after the Federal Reserve released a research paper by St. Louis Fed President James Bullard. In the paper, Bullard warned that, as a result of the persistent threat of deflation - and despite an extended low policy rate environment - the U.S. is closer to a Japanese-style outcome today than at any time in recent history.
Last week, Federal Reserve Chairman Ben Bernanke told Congress that the Fed could combat further unemployment and spur growth through communicating the path of interest rates, cut the rate it pays on bank reserves, or purchase more bonds. But in a conference call with reporters, Bullard cautioned that keeping rates near-zero may itself cause a decline in prices.
The conventional wisdom is that Japan has suffered through a lost decade partially attributable to the fact that the economy has been stuck in the deflationary, low nominal interest rate steady state, stated Bullard. To the extent that is true, the U.S. and Europe can hardly afford to join Japan in the quagmire.
Bullards prescription: the Federal Reserve should resume asset purchases if the economy falters and price deflation flares rather than rely solely on near-zero interest rates. A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.
The gold price has soared over the past 16 months as a result of the low rates and quantitative easing measures instituted by Mr. Bullard and his colleagues. Despite the crisis intervention measures, the economy is still sputtering and unemployment remains persistently high. Given that the first dose of quantitative easing has failed to cure these twin ills, it is hard to see where more of the same medicine will do the trick.
The side effect of this treatment has been the debasing of the currencies of every country that has followed a similar regimen. To protect their wealth against this debasement, investors have sought the palliative of the gold price and assets tied to the price of gold. Mr. Bullards tonic for a sluggish economy may or may not work a second time around, but it will likely provide the conditions for a renewed ascent to record highs for the gold price.