gold, page-14139

No doubt global GDP is still expanding, it's more the rate of expansion to which I am referring. Even China's growth has slowed as it transitions to become a consumer powerhouse. My emphasis nevertheless, is what's happening in the US, Europe, Japan. The US macro indicators, in particular, will drive much of the movements in the POG (and almost everything else).

Traditional growth rates prior to the GFC were somewhere in the order of 3-5%. Inflation could get considerably higher. We've now had 8 yrs of once-in-a-lifetime stimulus, including negative rates in several advanced economies. You would think GDP growth would be through the roof and inflation along with it.

I've been following some of the speeches of the Fed Reserve, and the suggestion is that we are now in a sustained period of low growth and low inflation - somewhere in the order of 0-2%. They suggest a 'new normal' of low or stagnant economic growth, forward estimates of which have been revised downwards for much of this year. They're not quite sure exactly why but have pointed to various factors including ageing populations, higher propensity to save, higher debt levels, declining productivity, or a hangover from the GFC.

If this view, that we are in a sustained low growth environment, holds true then there are significant consequences for monetary policy. For one, the neutral rate of interest - i.e. the rate at which interest rates are neither contractionary or expansionary - is much lower than in the past. If you're expecting a normalization of interest rates back to historic averages you could be waiting a long time. This is what's behind the "lower for longer" mantra which has been dished out.

A lot of this is old news. What has struck me is that the Fed has consistently avoided the second rate rise post GFC. Remember, we were supposed to get a handful of increases this year - still nothing. They really did cop a lot of criticism when they didn't raise in Sept and the economic data has marginally improved since then. It would seem a Dec. rate rise is a certainty, yet in the last week or so, the talk now is that we need to let inflation run harder (i.e. beyond their mandated target) before removing stimulus so that the economy can break free of the lasting impact of the GFC. We have a pattern of behaviour here.

My interpretation is that they'll do anything, or cling onto any excuse, to not raise rates at this time. If we get one in Dec. then don't expect another for a long while. In other words, an exact mirroring of what happened post Dec 2015.

The end game is lower average interest rates and a Fed, and other CBs, which are actively targeting ever higher rates of inflation. Gold benefits because the opportunity cost of holding it has fallen and because of its ability to hold its value during times of higher inflation.