Gold Glitters Out Of The 'Shadow'

Nov. 07, 2019 12:55 PM ETSPDR Gold Trust ETF (GLD)UGLDF, UGL, DGP, GLL, DGLD, DZZ, DGL, DGZ, GLDW, UBG, IAUF39 Comments
Massimo Guidolin profile picture
Massimo Guidolin


  • To obtain reliable forecasts of the price of gold, we propose to move the focus from a traditional "real rate view" to an overall monetary-policy-stance perspective.
  • Recent contributions in applied monetary policy analysis have shown the usefulness of shadow, or implicit, rate indicators of the stance of monetary policy.
  • The shadow short rate is equal to the policy rate in non-lower-bound/conventional monetary-policy environments, but it can freely evolve to negative values in lower-bound/unconventional environments.
  • When we purge the data of the effects of the strong U.S. dollar, 2014-2017 turns out to have been an exceptional period in which gold appreciated while real interest rates climbed and monetary policy went through a tightening cycle.
  • Gold prices can be expected to resume on an even stronger appreciation path because since early 2019, shadow short-term rate indicators have signaled a significant monetary policy easing in the U.S. and worldwide.

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by Monia Magnani and Massimo Guidolin

In recent weeks, a flurry of news concerning the stance of monetary policy, both in the US and around the world, has impacted the price of gold and of its exchange-traded vehicles, such as SPDR Gold Trust ETF (NYSEARCA:GLD), causing a surge in volatility. In this article, we argue that over the medium term, this news will keep contributing to the creation of a bullish environment for gold. The extent of such a favorable background can be fully appreciated only by looking at overall, overarching measures of the stance of monetary policy, such as those based on the notion of shadow policy rates.

Hard to formulate strategies based on unstable drivers

Even though most commentators have found reasons that these developments have impressed a bullish tone to the gold market, there are two obstacles to concluding that gold should be expected to move higher in the medium term (six- to 18-month horizon).

First, there are a host of additional gold-price drivers that it seems has been missed by the discussions on central-bank actions. For instance, it has been argued that the tendency of the US federal budget deficit to spiral out of control is a harbinger of future accommodative monetary policies and hence of inflation in the long run. This may be triggering bullish trades in the gold market. In an interesting article, Jason Tillberg has noticed that real wages, deflated by commodity prices, have been declining while gold has recently appreciated - and that, because of this, we should not expect gold to

This article was written by

Massimo Guidolin profile picture
Massimo Guidolin holds a Ph.D. from University of California, San Diego (year 2000). His curriculum lists employment positions with the University of Virginia as an assistant professor in financial economics, the Federal Reserve Bank of St. Louis at first as a senior economist and then as an Assistant Vice-President (Financial Markets), and the Accounting and Finance department of Manchester Business School as a chaired full professor in Finance. Massimo has also taught courses or held short-term positions at a variety of institutions around the world, such as Collegio Carlo Alberto (University of Turin), Olin Business School (Washington University in St. Louis), the Center for Research on Pensions and Welfare (CERP, University of Turin), and Universite' de Montreal in Canada. His teaching has spanned asset management, asset pricing theory, empirical finance, derivative pricing, and of course, econometrics both the undergraduate and graduate (MSc. and doctoral) levels. Massimo has published in top economics, econometrics, and finance outlets such as the American Economic Review, the Journal of Financial Economics, the Journal of Econometrics, the Review of Financial Studies, and the Economic Journal. He serves on the editorial board of a number of journals, among them the Journal of Economic Dynamics and Control (Elsevier Press), the Journal of Financial Econometrics (Oxford University Press), and the International Journal of Forecasting (Elsevier). Between 2013 and 2019 Massimo has been directing Bocconi's FT-ranked (8th) MSc. in Finance. His research spans a number of topics, going from applied asset management, non-linear time series models in finance and macroeconomics, and methods and models in forecasting.

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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