Rates, Inflation, And The Dollar; Headwinds For Gold

| About: SPDR Gold (GLD)


Gold has a robust inverse-relationship with interest rates, inflation, and the dollar.

Fiscal spending on infrastructure will stimulate the real economy; something monetary policy has failed to do.

Fiscal policy will create inflation, and eventually help start a new bull market in gold.

The fact that gold only moved up 1.8% and failed to break upside resistance in response to both the Bank of Japan and the Fed maintaining an easing stance, demonstrates the absence of fundamental support for higher gold prices.

Gold has a strong inverse-correlation with interest rates and the dollar. The chart below shows this correlation along with the upward bias in the rates across all three rate-curves (purple arrows).

The fact that the Fed has fulfilled one of its two mandates - unemployment - puts pressure on the Fed to at least talk tough on rates, but not enough to do anything until after the election.

After the election, regardless of who is President, America will likely start clapping with two hands, instead of the single-handed clapping of monetary policy. Ever since the last bubble, it has been the monetary-hand that has been flapping in the air keeping all the funny-money suspended at the top of the room, but incapable of having any positive impact on the real and productive economy.

Monetary stimulus, as provided by the Fed, only served to save the banks, and the financial industry more broadly. It did not stimulate the economy because the money never reached the productive base of the economic pyramid.

After the election, regardless of who is President, America will start using the fiscal-hand, and maybe, finally, we will hear some noise. If the government uses nearly-free money that doesn't have to be paid back for several decades (or never), to improve and expand ALL infrastructure; renewable energy infrastructure, airports, harbors, bridges, mass transit, and healthcare and education; then the real economy, and the business cycle will be stimulated.

Fiscal spending on infrastructure will put money into the real economy where it will lift the velocity of money, instead of fueling the bond and equity casino.

This spending, however, will introduce inflation, and historically, gold has served as a hedge against inflation (or the fear of inflation). Inflation is not exactly a worry at the moment. In fact, deflation is more concerning at the moment, and in combination with the election cycle, is the reason the Fed has not raised rates.

The employment part of the Fed's two-part mandate has been fulfilled, but the other part of its mandate, inflation, is still too weak to allow for an immediate rate hike (chart below).

Once the election is over, however, the fiscal spending will reach the street (and we don't mean Wall St.) and jolt (no pun here either) inflation awake, followed-up by the Fed stepping in with serious rate hikes in order to control it.

Controlled inflation and increasing rates, are NOT gold positive, so we expect gold to head lower until both rates and inflation are considerably higher than they are now; perhaps later in 2017. The chart below shows the long-term history of the gold-inflation-dollar relationship.

Inflation will stay down until fiscal spending is implemented after the election. At some point after the spending starts, inflation will make an entrance, and sometime after that, gold will start a new bull market.

In conclusion, gold's fundamentals do not support an increase in price at the moment. In fact, we expect gold's price to deteriorate from here until later in 2017, when interest rates, inflation, and the dollar will provide fundamental reasons for a new bull market to start.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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