The Relentless Rise in Gold Prices

The latest leg up in gold prices began after Chair Powell's dovish Jackson Hole speech

There’s endless speculation about the relentless rise in gold prices. There’s talk that this is foreign central banks who are buying gold to diversify out of the Dollar. Then there’s all the Dollar bears who say the gold rally is about an exodus from the Dollar as markets turn their back on the US and chaotic Trump policies. Some also link the gold rally to the global rise in government debt levels, with mounting anxiety in markets that higher inflation and currency debasement are inevitable.

Today’s post reviews each of these hypotheses. The only one that’s consistent with price action is the last one. Markets look like they’re increasingly worried about broad debasement of all G10 currencies, not just the US Dollar. That explains why gold is up so much since Chair Powell’s dovish speech at the Jackson Hole symposium, even as the Dollar has been stable against the G10.

Let’s review what we know about the recent move in gold prices. First, there’s an obvious catalyst, which is Chair Powell’s dovish speech at Jackson Hole on August 22. Gold prices are up a stunning 16 percent since then, after treading water for months in the run-up to that event. Clearly, that speech - which gave the “all-clear” for further Fed easing - plays a major role in the recent gold rally. Second, as the orange line in the chart above shows, the Dollar against its G10 peers has been stable after Jackson Hole, even as gold rose sharply (white line), which means the latest rally in gold isn’t about a flight out of the Dollar. It looks more like it’s a flight out of all G10 currencies, as fears of inflation and currency debasement grow. That’s consistent with the recent rise in very long-term yields, which I’ve documented in several recent posts.

The fact that Jackson Hole has been such a powerful catalyst is very revealing and worrying. It suggests that markets are highly attuned to mounting debt levels and fiscal policy that’s out of control in many places. Of course, it’s also true that there’s many mixed signals across markets. Inflation break-evens haven’t moved recently and things like Bitcoin are flat since Jackson Hole. But there’s no condition in markets that imposes consistency across different asset classes. Better for policy makers to heed the signal from gold and put fiscal policy on a sustainable course.