The gold market is looking to finish the week on the strong side, with prices up nearly $40 per ounce in mid-morning action on Friday. The day’s gains are more than enough to offset declines seen on Thursday, which featured very wild and volatile price action as Fed Chairman Jerome Powell spoke in Jackson Hole, Wyoming.
The gold bulls are focused on the inflation trade again, and many may now feel that U.S. interest rates are set to remain very low for an extended period of time. This ultra-low rate scenario plus other ongoing issues could set the stage for a significant rise in inflationary pressures combined with slower economic growth. Under such conditions, the path for gold could be sharply higher and the market could test or rise above the $3000 per ounce level in short order.
Nothing has changed in the bigger picture, despite the decline seen in the yellow metal yesterday. In fact, global central banks remain fully committed to keeping their foot on the gas pedal and the global marketplace is likely to remain flooded with stimulus for some time to come. Central bank stimulus measures could remain in place until the end of next year, possibly longer, and could potentially stoke inflationary pressures down the road.
The Fed is now targeting higher inflation rates, as the inflation rate has consistently undershot the desired 2% target for years now. The new Fed policy could have serious complications, however, if it is not carefully crafted and then communicated to U.S. businesses and households. The Fed’s plans could, however, end up slowing economic growth rather than boosting it. Overall, the central bank appears to be very reluctant to raise rates again and it could avoid doing so for years.
The next Fed meeting is scheduled for September 16th and could be a powder keg. It is the last FOMC meeting before the presidential election, and it could provide more clarity about the central bank’s plans going forward. A very dovish Fed, for example, could propel gold sharply higher into fresh all-time highs, while putting further downside pressure on the dollar. Whatever the case may be, investors will be looking for further clarity on the Fed’s plans after this week’s Jackson Hole symposium. That clarity could set the stage for trade across a variety of asset classes for months or even years to come.
Of course, there remains the crowd of market participants that will question how the Fed’s actions, or lack thereof, may affect gold and the markets. After all, a decade or more of low interest rates and massive QE has yet to spur inflation, so what makes investors confident that the central bank will be able to create it now?
The United States has gotten away with it so far, and there is little reason to believe it will not continue to do so, at least for now. What if the U.S. allows inflation to get too hot, however?
These are questions and issues that will be debated for some time to come. Although it is unclear exactly how things may play out in the months and years ahead, current monetary policy would seem to suggest that higher gold prices are not only likely but are inevitable.