Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Is Gold Market Going Back Into the 1970s?

Commodities / Gold & Silver 2020 Oct 15, 2020 - 05:00 PM GMT

By: Arkadiusz_Sieron

Commodities They say that time travels are impossible. But we just went back to the 1960s! At least in the field of the monetary policy. And all because of a new Fed’s framework. So, please fasten your seat belts and come with me into the past and present of monetary policy – to determine the future of gold!

At the end of August 2020, the Fed has modified its Statement on Longer-Run Goals and Monetary Policy Strategy – for the first time since its creation in 2012. As a reminder, the Fed will now target not merely a 2 percent rate of inflation, but an average inflation rate of 2 percent, which allows overshooting after the periods of undershooting. So, the Fed will try to compensate for periods of low inflation with periods of high inflation . Hence, on average , we will see a more accessible monetary policy and higher inflation - Good news for the gold bulls.



One of the many problems with the Fed’s new regime is that we do not know how long will be the period over which the US central bank will average inflation, or what does it mean that the Fed will tolerate temporaral inflation over 2 percent – it’s not hard to see that practically any policy action could be justified through an appropriate choice of the period’s length.

The second significant shift within the Fed’s strategy is a different reaction function. So far, the Fed reacted (at least in theory, the practice was a different kettle of fish) symmetrically to both upward and downward deviations from the natural rate of unemployment. When the economy approached full employment, the Fed started its tightening cycle to prevent overheating and the rise of inflation. Now, the US central bank will be informed by assessments of the shortfalls of employment from its maximum level. It means that the Fed learned to stop worrying about overheating and loved the inflation bomb.

In other words, the US central bank believes now that a robust job market can be sustained without causing an outbreak of inflation, so it will not hike interest rates preemptively, based on the signals coming from the labor market and other segments of the economy, but will wait for inflation to materialize and act only later.

Such an approach may seem right, especially after several years of low inflation. So why to worry about its rise? Why hike interest rates too early and kill an economic expansion? However, the Fed risks that inflation will get out of control . And that the US central bank would be surprised and its reaction would be delayed. In such a scenario, which is not unprecedented, the Fed will have to tighten its monetary policy to curb inflation aggressively. As a former Fed Chair William McChesney Martin said, the central banker's job is to “take away the punch bowl just as the party gets going.” At some point, the punch bowl has to be taken away, no matter how much the guests object. But the longer the party goes on, and the more drunk participants are, the harder it is to take the vase. If inflation exceeds 2 percent and continues its climbing, the Fed will have to take away the punch bowl very abruptly, much more aggressively than earlier and preemptive actions.

Sounds familiar to you? Indeed, this is why the Fed’s new monetary regime takes us back to the 1960s and, possibly, to the 1970s. Then as today, policymakers put a high priority on achieving full employment relative to price stability. The Fed mistakenly believed that unemployment's natural rate was lower than it was, so the inflationary pressure was unlikely to emerge. Consequently, the monetary policy was consistently too expansionary, leading to the Great Inflation in the 1970s (see the chart below).



Please look at the chart again. As one can see, high inflation did not show up overnight. Instead, it began to pick up in the late 1960s, together with massive fiscal deficits (hm… high deficits – don’t they look familiar?) caused by the Vietnam war and “Great Society” programs. But despite the upward trend in inflation since 1965, the Fed remained focused on full employment, believing that inflation would subside, based on an overly optimistic view of the economy’s potential output and natural unemployment rate. As a result, the monetary policy remained overly accommodative, with interest rates too low until Paul Volcker came and hiked the federal funds rate aggressively to almost 20 percent in the early 1980s, as the chart below shows. He did not take away the punch bowl, he broke it with a sledgehammer!



The Volcker’s aggressive tightening was clearly bad for gold, which entered a bear market . However, the 1970s, when the Fed was behind the inflation curve, was an excellent period for the yellow metal. History never repeats itself, but the Fed’s new strategy increases the risk of replaying the unpleasant past (as well as the increased broad money supply in response to the coronavirus crisis). Even if the 2020s only rhymes with the 1970s, they should still be positive for the gold prices.

Thank you.

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in