The future price of gold
will likely reflect a wide variety of prospective developments. That’s
what makes gold so interesting . . . and so difficult to predict.
The intensity of
private-sector demand in China, India, and elsewhere in Asia is high on my
list of gold-price influencers.
Similarly, the magnitude
of net central-bank reserve acquisitions will almost certainly play an
important role.
So too could the unfolding
economic and political situation in Europe.
Alternatively, gold
prices may wind up hinging most of all on some black swan or unpredictable
event in the ever-volatile Middle East or Korean peninsula.
But on the top of my list
of prospective gold-price determinants, three related factors stand out:
- First,
prospects for the U.S. economy. Will we see further recovery . . . or a
slide back toward recession?
- Second,
what will be the monetary-policy response expected by the financial
markets and actually implemented by the Federal Reserve?
- Third,
will Wall Street sustain current stock-market valuations?
With households still
overly indebted, how can we expect consumers (who account for more than
two-thirds of GDP) to increase spending sufficient to fuel continued economic
expansion?
With the European
economies stumbling and with the euro and yen both sharply devalued relative
to the U.S. dollar, how can we expect exports to contribute to economic
growth here at home?
With sequestration taking
a growing bite out of demand, how can we expect Federal expenditures to give
the economy a lift and the workforce any succor?
The answer to each of
these questions is “We can’t!”
Moreover, if we are
looking for a bubble, we need look no further than Wall Street where equity
prices have been inflated to levels far above any rational measure of
intrinsic value by $85 billion in new money created every month by the Fed.
When it becomes apparent
that the economy is faltering, the Fed will step up monetary accommodation,
extending its program of quantitative easing - let’s call it QE5. And,
if the past is any guide, easy money will again send gold prices higher, just
as it did in 2011 when quantitative easing sent the price of gold to its
all-time high near $1,924 an ounce.
Moreover, in a faltering
economy - with or without more monetary accommodation - stock-market
investors will be forced to recognize that corporate earnings are
insufficient to justify inflated equity prices. As stocks move lower,
Wall Street will cease competing so successfully with gold for investment
funds . . . and the yellow metal will again become the principal beneficiary
of the Fed’s hyperactive printing press.
