The latest post in U.S. Gold News’ series with Dr. William Chittenden, Department Chair and Associate Professor of Finance at Texas State University. In last week’s post we discussed why gold should be a part of any financial plan; this week’s entry focuses on how the economy affects gold and how political issues can affect prices.
U.S. Gold News: Gold is generally seen as insurance against bad economic times. Despite the many questions about the U.S. economy, gold prices remain in a downward trend. However, many reports suggest that all the fundamentals backing gold are still in place. What fundamentals do you see supporting the price of gold?
William Chittenden: I see the greatest fundamental supporting gold is the fear of inflation. Over the last 4 ½ years, the Federal Reserve has quadrupled the size of its balance sheet, going from about $800 billion to over $3.3 trillion today. My fear is that the Fed will not be able to unwind this position in an orderly fashion. If the economy gains traction and takes off, rapid inflation will be the result.
USGN: Beyond the U.S., the global economy seems to be playing a larger role affecting gold demand and therefore gold prices. As you look at the geo-political situation around the world, what are the main issues to watch affecting gold?
WC: Although there are many things that can affect the price of gold, two to watch today are inflation fears and political and economic uncertainty. For example, investors in India are concerned about a slowing economy. Because so many Indian investors are turning to gold, India implemented a tariff on gold (currently at 8 percent) to help reduce gold imports. This has put some upward pressure on gold prices. On the other hand, things are calmer in the Middle East as compared to a couple of years ago, aside from Syria. This reduction in “fear” has led to lower gold prices.
USGN: As we mentioned earlier, the gold market has been swinging up and down a lot lately. What would you say is causing volatility in the gold market currently?
WC: As discussed in the question above, there are forces on both sides of the gold market. Good economic news is typically bad for gold prices while bad economic and political news is generally good for gold prices. Two or three years ago, all of the news seemed to be bad and gold rallied. More recently, there has been a mix of good and bad news, causing the gold (and stock market) to see an increase in volatility.
In part 3 of our series, Dr. Chittenden discusses the relationship between physical gold and the stock market.