GOLD PRICE NEWS - The gold price slid $14.95 to $1,194.14 Friday morning as the price of gold fell after further economic data showing tepid signs of inflation. The drop in the gold price pushed the yellow metal back into negative territory for the week, and extended its monthly decline to $46.57 per ounce. The SPDR Gold Trust (GLD), which acts as a proxy for the gold price, sunk by $1.54, or 1.3%, to $116.69 ahead of the U.S. equity market open.
Weakness in the gold price came after the Consumer Price Index (CPI) for June fell 0.1% – below the unchanged level economists were expecting. The core CPI, which excludes food and energy costs, increased 0.2% - above the 0.1% figure expected. This tepid indicator of inflation was the third consecutive monthly decline for the CPI, and is consistent with the Federal Reserve’s outlook that the risks of inflation are low.
One longtime bull on the gold price, Jim Grant, discussed his view on the Federal Reserve in a recent interview with Bloomberg. The editor of Grant’s Interest Rate Observer and a highly respected voice within the financial industry expressed concern regarding the Fed’s potential additions to the Board of Governors. Grant warned, “I think the first order of business will be to try once more to print enough dollars to make something happen in the U.S. economy.”
According to Grant, the new additions will not signal a change in the Fed’s monetary policy. Speaking about the San Francisco Fed President, Grant says, “I think that Janet Yellen is a well credentialed, consensus-hugging economist straight out of the Fed HR department. She is ideal from the point of view of the Fed bureaucracy. She will make not one ripple.” Grant points out the fact that Yellen has had 36 opportunities to vote on monetary policy and has voted yes 36 times.
With respect to the Fed’s monetary policy, Grant opined that “the fundamental monetary dilemma which is that the U.S. dollar is a faith-based currency of no intrinsic value that is manipulated by the Fed and the consequences of the manipulation are often quite different from what was intended.“ Grant, who has been bullish on the gold price for many years, has called into question the sustainability of the current international monetary order.
In addition, Grant challenged the notion that deflation is outright bad for the economy. The editor of Grant’s Interest Rate Observer argues that the massive amount of credit creation undertaken by the Fed to combat deflation is more deleterious than the problem itself. Grant warns of more quantitative easing (QE) in the near future, stating “The Fed is already clearing its throat. You can see this in the newspaper leaks.“ If a new round of QE is initiated, the gold price is likely to break out of its recent trading range and challenge the all-time high of $1,265 per ounce.
How much quantitative easing will be necessary to spark a sustained recovery? Will it be another $2.5 trillion like last time or could it be closer to the $5 trillion that the Daily Telegraph’s Ambrose Evans-Pritchard is forecasting? An expansion of the Fed’s balance sheet would likely lead to another push higher in the gold price, which has already risen 36.6% since Chairman Bernanke announced the U.S. central bank would engage in a quantitative easing program on March 18, 2009.
In an op-ed in the Wall Street Journal in December 2009, Grant reiterated that “Gold is appreciating in terms of all paper currencies - or alternatively paper currencies are depreciating in terms of gold - because the world is losing faith in the tenets of modern central banking.”
