Economist Perspective: Gold’s Bumpy Ride and Interest Rates

Economist Perspective: Gold’s Bumpy Ride and  Interest Rates

[The Economist Perspective with
Blu Putnam] – Blu Putnam: The gold
prices had a nice run but it has not been smooth. Having risen to 1350 per ounce
in April 2018, gold sunk below 1200 by August 2018. Then gold prices rose above
1300 by March 2019, took a breather and pressed on
to pass through 1400 in the summer of 2019. There is plenty of controversy
about what drives the gold price. Global tensions, portfolio
diversification, production costs, demand from China
or Central Banks, etc. All these factors matter,
however, our research suggests that currently, t he
one most important factor is the direction of
interest rates in the United States. Having risen to 1350 in April
2018, the realization that the fed was on a
path to keep raising rates possibly through
2019, that’s what sunk gold to below 1200 in August
of 2018. It was not until the fed
let it be known that it was going to halt it’s relentless
step wise rate rise program back in late 2018
that gold moved from 1200 to 1300 and again in Spring and
Summer of 2019, it was the fed signal that it was
willing to cut rates that ignited the rally that brought
gold over 1400 per ounce. This interpretation that gold
is now predominantly rate driven comes with
some interesting suggestions. First, for gold prices
to head to 1600 or higher it will take a few more
rate cuts from the fed. Second, global tensions still matter
for gold, but with the trade war in play, global
tensions are now co-related with economic expectations
and thus rates, that is a worsening of tensions leads to
decelerating growth and the rate cuts, which is good
for gold prices. While it is unlikely anytime
soon despite continued US China trade talks, an end to
the trade war would raise global growth expectations
bring back the possibility of rate hikes and that would not
be so good for gold. Third, if you buy the
first two points, then gold is probably not nearly as
beneficial for portfolio diversification as it
once was. I’m Blu Putnam, Chief Economist
CME group. [Line Break]

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