Gold Shimmers in the Face of Fed Tightening
After five years of disappointing returns, this year’s double-digit gains in gold prices have surprised many investors, especially in light of the Federal Reserve’s (Fed) continued monetary policy tightening. Conventional wisdom held that as the Fed hiked short-term interest rates, the higher opportunity cost to own gold would put additional downward pressure on prices.
However, U.S. monetary policy only tells part of the gold story this year. While the Fed has been “tapping on the brakes” with two rate hikes this year and a third expected in December, the European Central Bank (ECB) and Bank of Japan (BOJ) continue to unleash extraordinary levels of stimulus in the form of quantitative easing (QE) and negative interest rate policies. The Fed’s bloated balance sheet of $4.4 trillion in assets is now smaller than the ECB and BOJ balance sheets of $5.1 trillion and $4.6 trillion, respectively.
This week’s chart tracks the strong correlation this year between the price of gold and another measure of unprecedented central bank monetary stimulus ─ the total volume of global bonds trading with negative yields. From a global perspective of central bank accommodation, gold prices have been performing as an effective hedge against the risks of excessive money printing and currency debasement.
Despite this year’s broad-based financial markets gains and near unanimous view for a continuation of synchronized global economic growth, the rally in gold prices this year is signaling a much different picture. The end of Fed tightening is likely to come sooner and global money printing may last longer if the yellow metal keeps moving higher.
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