Last week, no less than four Federal Reserve regional Presidents went public in advocating that the U.S. central bank raise rates during their quarterly meeting in June. Of course, every one cited a caveat that it should be done only if economic conditions warrant it, but seeing as the Fed, as well as the ECB, have spent more months jawboning policy changes than actually doing them, the market has come to the realization that central banks more and more are to be likened to the boy who cried wolf.
And this is one of the major reasons why gold prices have soared to more than 20% gains since the beginning of the year, and following the unexpected December rate hike by Janet Yellen. And it is because of the combination of central banks not following through on their promises, and a growing lack of confidence in them, that is leading many investors and fund managers to advocate to their clients to buy gold for the first time since 2013.
I think we are in a new gold market actually. Investors are very concerned about financial risk and gold is being used as a safe heaven. Especially, investors are looking at central bank policies. We've seen these radical central bank policies that don't seem to be working and now with negative rates, the Fed not able to increase rates as aggressively as they'd like to, it's creating a lot of concerns in the financial system. - Joe Foster, Manager of the Lombard Odier World Gold Expertise Fund. - MorningstarIn addition to Joe Foster, several hedge fund managers like Stanley Druckenmiller and George Soros have put their own money on the line and are taking large positions in gold because the state of the financial system is warranting it in spades.
This current Presidential election cycle is also revealing the lack of confidence in central banks to be able to create monetary policies that will rescue both the economy and the debt bomb that they and governments have created since the advent of ZIRP, NIRP, and QE over the past eight years. And it is why the likes of Donald Trump and Bernie Sanders are joining in with economists like Jim Rickards to call for a return to a gold standard of some form, and removal of absolute power over currencies by the central banks.
The Fed was getting bashed from all sides. "It is unacceptable that the Federal Reserve has been hijacked by the very bankers it is in charge of regulating," Democratic candidate Bernie Sanders said in a New York speech in January. Economists who support Sanders, like Nobel prizewinner Joe Stiglitz, see the Fed's quantitative easing as a form of trickle-down economics that's exacerbated inequality.
The proponents of gold or some other fixed monetary rule are more likely to be found in the Republican Party, and what they object to is the very idea of money creation by fiat, not just its distributional effect. Still, there's some overlap. Ted Cruz, in one of the early candidate debates last year, said the Fed "should get out of the business of trying to juice our economy and simply be focused on sound money and monetary stability, ideally tied to gold."
Then there was Donald Trump. "We used to have a very, very solid country because it was based on a gold standard," he told WMUR television in New Hampshire in March last year. But he said it would be tough to bring it back because "we don't have the gold. Other places have the gold." - St Louis Post DispatchIn the end however, the U.S. may end up being the follower and not the leader of the return to the gold standard, as economies like China and Russia are preparing for a return of gold backed money and trade through their massive accumulation of physical gold. And at stake is the power and authority to control the next coming global financial system, and where that old axiom still rings true... as those who hold the gold, make the rules.