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Gold and the US economy

Apr 17, 2015

From Senior Economic Advisor, Jeffrey Nichols:

A reassessment of economic prospects and Fed policy in the weeks and months ahead could be just the turn of events that will support a springtime recovery in the price of gold, lifting the yellow metal up and out of its recent trading range.

Gold prices have been trading in recent weeks mostly between $1,175 and $1,225 an ounce. And, unless and until some “outside the market” surprise comes along to push gold one way or the other, the yellow metal could remain range bound for some weeks to come.

Meanwhile, short-term fluctuations within this $50 an ounce trading range will continue to be “data driven.”

With the release of most every economic indicator, gold traders and investors re-assess their expectations of future economic growth – and try to divine the consequences for prospective Federal Reserve monetary policy, particularly with respect to short-term interest rates.

In turn, interest-rate expectations appear to be the key to the day-to-day variations in the price of gold – with the prospects of higher rates seen by many to be a harbinger of lower gold prices.

Confusing matters still more are the frequent speeches and public pronouncements of one or another Federal Reserve governor or senior staff member. One day we hear from the policymakers that the economic expansion is sustainable . . . and the next day that it’s not.

Despite all the ambiguity, there seems to be some consensus in financial markets (including gold) that the upswing in the U.S. economy has much life yet ahead.

We dispute this rosy scenario, believing instead that the economy will show clearer signs of weakness in the months ahead – dashing expectations of an imminent rise in interest rates and giving gold what it may take to move up and out of the recent trading range.

As I have written in these Rosland Capital Gold Commentaries over the past year, the economy will continue to underperform for a long time to come, suffering from what some economists have labeled “secular stagnation.”

In short, consumer spending, which accounts for roughly two-thirds of U.S. gross domestic product (GDP), cannot support healthy rates of economic growth because many households and workers remain overly indebted, underemployed, emotionally depressed and prone to more cautious spending behavior.

Moreover, the U.S. economy is hurting from weakness in our overseas markets and is burdened by a stronger dollar, which makes American exports less competitive.