SPDR Gold Trust (ETF) (NYSEARCA:GLD) prices are up by about 4 percent over the last month, and the exchange traded fund (ETF) has continued to trade higher even after tensions in North Korea calmed. The reason that the price of the metal is staying high has much more to do with the real risks faced by the US economy rather than the imagined risk of nuclear conflict. It’s Janet Yellen, not Donald Trump, with her hand on the big red button.
The SPDR Gold Trust (ETF) (NYSEARCA:GLD) was up again on Thursday as investors tried to predict what Janet Yellen will do next. As far as they can tell, based on the Federal Reserve’s response to weak inflation data, she’s less likely to raise interest rates at the next meeting of the Federal Reserve Open Market Committee.
As long as she stays unlikely to raise rates more quickly, the gold price may stay high.
Inflation drives SPDR Gold Trust (ETF) (NYSEARCA:GLD)
On Thursday morning the entire market appeared to be depressed because of two things: inflation and President Trump. Discounting the president’s glorification of the confederacy as a simple stock market shock is probably wise. For all of the talk about “economic anxiety” during the campaign the President’s ill advised mouthing isn’t likely to be a function of the economy.
Low inflation, which the Federal Reserve is concerned about according to minutes of its most recent meeting, is something to be very concerned about. If inflation doesn’t rise it seems that the central bank might delay its rate rising, a sign that growth in the US economy may not be growing as quickly as stock market valuations.
With dynamics in the US supporting limited flows into assets like the SPDR Gold Trust (ETF) (NYSEARCA:GLD), the price is further buoyed by international demand. With their economies still growing at a fast clip and inflation more concerning than in the US both India and China are creating extra demand for bullion.
Why is low inflation scary?
The very low recovery rate since the financial crisis has been blamed on all sorts of things, though few economists would say they know the cause for certain. A broad idea is that the United States is facing the same sort of sclerosis that has affected Japan for more than 20 years.
That economic situation is market by very low growth and low inflation while interest rates remain very low. It’s been called secular stagnation, among other things, and it’s the biggest risk apparently facing the US economy right now.
In such a situation, corporate earnings could crumble and consumer sentiment fall. There’s no strong evidence that this is the type of situtation that the US is in right now, but some of the top minds in the country are very worried about it.
SPDR Gold Trust (ETF) is a decent bet on low inflation
Gold doesn’t really suffer in environments with high inflation, but that doesn’t mean the metal is bad in low inflation environments either. The SPDR Gold Trust (ETF) (NYSEARCA:GLD) could be a good bet on low inflation because of the specific dynamics behind low inflation in the US.
The real problem is that economic models of what drives inflation have failed, at least to some extent. The consensus is crumbling, and there is no policy proposal on the table that is likely to make it through the deadlock between the Republican Congress and the Republican President.
With a major global recession a possibility at any point, the SPDR Gold Trust (ETF) and other gold assets might be good ways to play the lull in Western growth. That’s because of low inflation, however, not because of threats made against Guam.