Gold Shimmers in the Face of Fed Tightening

November 9, 2017

Gold Shimmers in the Face of Fed Tightening Photo

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.

Key Takeaway:

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.

Tags: Chart of the Week | Federal Reserve | Monetary policy | Interest Rates | Gold | Rally | Central banks | Gold prices

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This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.  This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

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High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.

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