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Gold - Driven by American Politics and Monetary Policy Expectations

October 25, 2013

NEW YORK (October 24, 2013) – Jeffrey Nichols, Senior Economic Advisor to Rosland Capital (www.roslandcapital.com), had the following comments on the current gold-market situation and outlook:

With Washington’s latest budget and debt-ceiling crisis behind us, gold traders and investors are refocusing their attention on U.S. monetary prospect – with expectations of tapering later this year rising and falling with the flow of economic data and the apparent strength of economic recovery.

But, before long, America’s dysfunctional politics will again share the limelight as a key gold-price driver. 

Gold prices rallied smartly, jumping some $40 an ounce (or more than three percent) soon after last week’s last-minute agreement in Washington to postpone negotiations on government spending and the debt ceiling until early next year. 

Gold’s very positive reaction to the postponement reflected revised expectations of prospective Fed policy with a growing number of market participants anticipating no imminent change in Fed policy – that is to say, no tapering or scaling back of the Fed’s super-loose monetary policy – through the end of this year and possibly into next year’s first quarter. 


We have long argued that a still-fragile and feeble economy would weigh against early tapering -- and believe the Fed will postpone cutting back in its monthly bond purchases until next spring or beyond.

As a result, we expect the metal's price will continue to be data driven . . . and we expect data to be pro-gold, showing a weaker-than-hoped for economy. Fed officials will remain especially concerned about the high rate of unemployment, the growing number of under-employed, and the numbers of ex-workers who have simply given up looking for employment – and gold investors would do well to monitor these economic indicators as well for clues to where gold prices may be headed next. 

Indeed, in our view, the economy is weaker than most imagine . . . and this will force the Fed to maintain its program of quantitative easing with purchases of Treasury and mortgage-backed securities continuing at a rate of $85 billion per month though the early months of next year and possibly longer.  This is one of the key reasons we remain more bullish on the outlook than many other gold analysts and market pundits. 

Moreover, with Federal Reserve Board Chairman Ben Bernanke’s tenure at the Fed ending on January 31st and Janet Yellen assuming the top spot, and other changes in the voting membership of the FOMC, the Fed might postpone any shift in monetary policy until this coming March or April.  What we do know is the Fed wants to see a durable recover – and any change in policy is dependent on the economy showing signs of renewed vigor. 

Importantly for gold and world financial markets, the U.S. Congress has merely kicked the can down the road.  After shutting down much of the Federal government for 16 days and coming dangerously close to a default of some sort on U.S. Treasury debt, Washington granted the U.S. economy a temporary reprieve – agreeing to resume the business of government at current spending levels through January 15th and averting default by extending the nation’s borrowing capacity though February 7th

Before long, Congress will once again be engaged in a continuing, and likely acrimonious, drama over spending and debt limitations.  With this “politics as usual” on Capitol Hill it seems highly improbable the Federal Reserve will alter its current monetary stance at its upcoming October, December or January FOMC policy-setting meetings. 

With the right-wing Tea Party Republicans digging in for a fight and unwilling to compromise, there’s little reason to believe things will be much different in the next round of budgetary and debt negotiations.  We expect renewed uncertainty over the eventual outcome – and the continuing possibility of a U.S. Treasury default. 

We imagine the American public and our foreign creditors will start worrying again about renewed Federal budget and debt discord come around Thanksgiving or soon there after – with negative consequences for the U.S. economy as personal consumption, business spending, employment, and Wall Street all take a hit.  Importantly, these fears and uncertainties will weigh increasingly heavy on the U.S. dollar in world currency markets to gold’s advantage. 

Tapering or not, monetary policy will, in any case, remain in a stimulative pro-gold mode for months, if not years, to come as the economy continues to struggle to regain its footings.  And, in any event, as important as it is, there’s more to gold-price prospects than U.S. monetary policy and fiscal disarray. 

Looking to the days and weeks ahead, Indian festival and wedding-related demand, restocking by jewelry manufacturers worldwide in anticipation of Christmas and New Year retail buying, continuing strong demand from China, and a pick-up in central-bank acquisitions, should underpin the gold price and could soon contribute to a resumption of the long-term uptrend in the metal’s price. 

About Rosland Capital

Rosland Capital LLC is a leading precious metal asset firm based in Santa Monica, California that buys, sells, and trades all the popular forms of gold, silver, platinum, palladium and other precious metals. Founded in 2008, Rosland Capital strives to educate the public on the benefits of investing in gold bullion, numismatic gold coins, silver, platinum, palladium, and other precious metals. Rosland also helps people who wish to protect their wealth by including a gold or precious metal-backed IRA in their asset portfolio. Click here for more information.

About Jeffrey Nichols

Jeffrey Nichols, Managing Director of American Precious Metals Advisors and Senior Economic Advisor to Rosland Capital, has been a leading precious metals economist for over 25 years. His clients have included central banks, mining companies, national mints, investment funds, trading firms, jewelry manufacturers and others with an interest in precious metals markets.