Maximus

Headwinds for Gold?

I like this article and agree that monetary tightening would be bearish for gold.

Apart from the ECB's stance duly noted on Thursday by the press, I have also read that Brazil and several other emerging markets will begin tightening.

A recent article in The Economist noted that emerging markets with dollar pegs will have a hard time tightening however if the US does not. They are averse to allowing exchange rates to rise since this might exacerbate inflation in the short run (from higher capital inflows). The Economist argued that so long as emerging markets failed to raise interest rates or depeg and allow exchange rates to appreciate, they would experience double digit inflation and commodity prices would remain high.

If this is true, does not the case for gold rests less with the European Union's monetary policy and more with the dollar and other currencies pegged to the dollar? As long as real interest rates are negative in the US and emerging markets then gold will go higher.

The key to commodity prices and when to sell seems to be real interest rate levels in the US and emerging markets.

Incidentally, I wouldn't mind being in euros either if the EU lifts rates. However, the ECB is going to have hard time acting alone. The ECB is in a bind: it needs a coordinated policy with other central banks to raise rates and fight inflation, but it also does not want to exacerbate economic conditions in some of its weaker countries, notably Spain, Portugal and Italy. There is already social unrest in Spain with several strikes by fishermen and truckers scheduled this week to protest the high price of oil. Higher interest rates will exacerbate the average Spanish household's ability to meet its monthly mortgage payment.