Greenspan provides reasoning for gold price’s resilience
The World Gold Council released the February edition of Gold Investor last Thursday, with an interview with Alan Greenspan on his outlook for 2017. The ex-chairman of the Federal Reserve explained that the West had gone through stagnant productivity growth, fuelled by the aging of the baby-boomer generation and the channeling of savings into entitlements at the expense of capitalisation.
Inflation is usually associated with high growth and demand, yet Greenspan is concerned about ‘stagflation’ – inflation in slower environments. This looks to be caused by monetary policy-centric economics, where demand and consumption is driven by easy credit and expansion of the money supply, instead of steady savings and investment.
Greenspan notes that ‘significant increases in inflation will ultimately increase the price of gold. Investment in gold now is insurance. It’s not for short-term gain, but for long-term protection’. Gold Is the primary global currency said Greenspan: ‘It’s one of the only currencies that has an intrinsic value. It has always been that way. No one questions its value, and it has always been a valuable commodity, first coined in Asia Minor in 600 BC’.
Fiat currency, credit instruments and other financial tools, on the other hand, ‘depend on the credit-worthiness of a counter-party’ he says. For Greenspan, everything seems to rest on bad monetary policy, as ‘the non-financial part of the US economy was in good shape before 2008’.
Arguably, the backlash to this economic paradigm has come in the form of populism, both in the States and in Europe, with leaders promising to shake things up in an attempt to challenge the status quo. The problem is, at least for Greenspan, that fiscal policy is a more fundamental policy than monetary. We can easily see Trump’s fiscally aggressive approach as an example of adding further to growth of government expenditure, which has ‘already [destabilised] the financial system’.
The outlook for the gold price throughout 2017 could well be a comfortable bull market. It has been repeatedly stated that continental political uncertainty, Trump’s fiscal policy and the Fed’s monetary policy will be the key players in determining the gold price, yet despite indicators that would usually dampen the gold price, the overall trend seems positive.
Whilst potential rate hikes dampen price expectations for gold, once the anxiety is eased, it’s business as usual. Even if rates do increase, such as last December, a temporary price blip is usually overshadowed by general trends. Bloomberg quoted Ole Hansen, head of commodity strategy at Saxo Bank A/S, as saying ‘the market worries more ahead of the event than after,’ and that ‘once the hike was out of the way, a more balanced picture emerged and that together with a reality check of the potential Trump impact did the rest [to keep gold buoyant]’.
Fiscal aggression (government spending) usually makes short-term macro indicators look healthy and has a bearish effect on the gold price. Bloomberg noted that Trump’s vow to supercharge the economy with infrastructure spending would raise returns on assets and shares, while havens such as gold would remain comparatively dull. Yet his political pomp and unpredictable nature seems to have investors more worried than excited about an asset price surge, and the gold price still creeps up.
On the continent, comments from French presidential hopeful Marine Le Pen that, if elected, she would cease central bank independency and print money to finance welfare, suggest populism would further bad economic habits. The unexpected gold price creep, despite potential short-term asset price lurches, suggests that the long term trends Greenspan points out appear to be more important than the short term traditional factors that drive the gold price.
Link to this article: : http://www.goldmadesimplenews.com/analysis/greenspan-provides-reasoning-for-gold-prices-resilience-12981/