USAGOLD/Peter A. Grant/04-12-17
Gold remains well bid in the wake of solid gains on Tuesday. The yellow metal is now up more than 10% year-to-date. Silver is up more than 15% on the year, despite the fact this is has been unable to take out its previously established high from February at 18.48.
According to Janet Yellen, the Fed is pivoting from stimulus to sustain mode, even as considerable growth risks persist. The WTO sees global growth between 1.8 and 3.6% this year, amid “deep uncertainty” about economic and policy developments.
Perhaps not surprisingly, the WTO is particularly worried about weak global trade. “[T]rade growth remains fragile and there are considerable risks on the downside. Much of the uncertainty around the outlook is political,” said WTO director-general Roberto Azevedo.
IMF President Christine Lagarde weighed in as well: “There are clear downside risks: political uncertainty, including in Europe; the sword of protectionism hanging over global trade; and tighter global financial conditions that could trigger disruptive capital outflows from emerging and developing economies.”
Yellen herself sounded a bit of an alarm on Friday in saying, “The fact that you can create that many jobs in the context of growth that is so low points to a significant problem.” She must realize that tighter monetary policy is unlikely to invigorate productivity or growth; in fact, it may have the exact opposite impact.
Any help that the Fed might have been hoping for on the fiscal side seems to be fading fast. President Trump who seemed inclined to move on to tax reform after his healthcare plan stalled in Congress, told Fox Business this morning that he wants to “do healthcare first.” As for Trump’s infrastructure spending plan, that remains “up in the air,” according to his special assistant for infrastructure policy.
Why then is the Fed tightening into actual weakness and mounting growth risks? My guess is that the Fed wants some clearance above the zero-bound so that they can have a policy response that hopefully doesn’t include a negative Fed funds rate, or a return to QE, in the event of a recession.
If the Fed is forced to reverse course and start easing, it would be an admission that massive monetary stimulus for nearly a decade was a failure. It would confirm that negative real rates may just be here to stay, which would trigger additional strong interest in gold.
