A decent jobs report, and the fact the stock market didn’t melt down the moment the calendar clicked over to August, caused what will likely be a brief dip in gold prices. The technical analysis is a bit more complicated but the upshot is market forces will continue to put upward pressure on gold prices in the months ahead.
The jobs number is significant, not for what it says about the real state of our economy, but the likely impact it will have on the Fed’s willingness to raise interest rates. In calmer economic times gold and interest rates have tended to move in opposite directions, but there’s solid reasoning to suggest that even if the Fed moves ahead with a quarter-point bump later this year, it’s not going to have much of an impact on long-term gold prices.
Stagnant Global Growth
Lack of growth isn’t just a problem in the U.S.; it’s a problem for virtually the entire world. Stagflation, a term many haven’t heard since the 1970s, has started to surface once again. Under the more common definition, stagflation typically includes high unemployment, but there are other factors mimicking the effect of high unemployment on consumer spending. This time it’s the sheer scale of global debt that’s limiting investment for growth, and flat wages are mirroring the impacts on spending typical of high unemployment. The sheer scale of global debt, now running at three times the size of the global economy, will be a near-permanent drag on growth.
When worker wages are flat in an environment of rising housing costs, then you’re going to see a cutback in spending, just as if those people were unemployed. The difference is that unemployment is, hopefully, a temporary condition, while what we’re seeing with spending today will last until wages increase convincingly. Since that hasn’t happened since the 1940s, it’s a pretty safe bet wages are going nowhere.
If you hear the term “expansionary monetary policy,” that’s a fancy way of saying “printing money.” Central banks in Europe and Britain are trapped in an “expansionary” mode because of the uncertainty generated by the Brexit vote. Just last week the Bank of England announced it would inject £70 billion ($92 billion) into the British economy in an attempt to offset the impacts of Brexit, flooding the market with cash to counter the outflow of investment dollars. Accommodating monetary policy is what keeps experts bullish on gold for the indefinite future.
Volatility Provides Buying Opportunities
The huge upside we’ve seen on gold prices since the beginning of the year is bound to create volatile market conditions. As we’ve seen with the interest rate concerns, even the slightest whiff of rumor can trigger profit-taking in precious metals. But as long as the long-term fundamentals favoring gold stay in place, there’s no reason not to take advantage of the dips.
Invisible, Inevitable Inflation
Two percent doesn’t sound like much, but that’s the inflation target central banks set as desirable in an optimal economy. Yet that two percent bite makes $100 in cash today worth just $98 dollars next year. It may not feel like a big whack, but those two percent hits year after year are relentless, particularly when you’re not making anything in interest.
Where you really see the erosion in buying power is in your savings and in the cash and dollar-denominated assets in your retirement portfolio. The only way to protect the value of cash is to convert it to a liquid hard asset that maintains buying power, and which isn’t affected by inflation’s attrition.
It may seem a little ghoulish to profit off the weakness in the global economy, but the opportunity is open to everyone, and it’s money you’re going to need. The staggering load of global debt, continuing currency-weakening policies by central banks and ongoing uncertainty will keep a tailwind behind gold prices for a long time to come.