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Sunshine Profits is built around the belief that we are in a secular bull market in all commodities and that precious metals will be among its greatest beneficiaries. Having established long term trends, our investment strategy focuses on evaluating low-risk entry points, as well as timing potential tops.

SPDR Gold Trust (ETF) (GLD): Will Bullard’s New Approach Affect Gold?

James Bullard

James Bullard has recently proposed a new framework for economic projections and monetary policy. What does it mean for the gold market?

As we already wrote this week, the Fed is rethinking its monetary stance. The FOMC members see the futility of their tools. They even started to admit that their previous models are not particularly useful and that the errors in forecasting are persistent. For example, the St. Louis Fed has recently changed its approach to near-term U.S. macroeconomic and monetary policy projections. As its President James Bullard explained, in the old model there was a unique long-run equilibrium which is essentially an average of the past and macroeconomic variables which are converging to the steady state. In the new narrative, the concept of a single, long-run steady state is abandoned. Instead, there is a set of possible regimes that the economy may visit. As these regimes are not forecastable, there are no long-term projections and the forecasting horizon is limited to two and a half years.

What does it imply for the Fed’s policy and the gold market? The old narrative assumes that output growth and the inflation rate will finally return to normal levels. Therefore, the federal funds rate would likely rise over the forecast horizon to be consistent with its steady state value. Meanwhile, in the new model, the policy rate would likely remain essentially flat over the forecast horizon to remain consistent with the current regime of low productivity growth and low real interest rates. Hence, the new Fed’s framework would be positive for the gold market as it would lower market expectations of interest rates hikes and support the price of the shiny metal.

Moreover, a new model could reduce the Fed’s credibility. This is because its adoption would admit that the U.S. central bank is not able to forecast the long-term state of the economy as it may only adapt to exogenous changes in regimes.

Summing up, the St. Louis Fed has recently changed its approach to near-term U.S. macroeconomic and monetary policy projections. The new model proposed by its President James Bullard would make the Fed even more agnostic and less inclined to provide clear guidance. Such an approach should reduce the faith that the Fed keeps the economy under control and should increase the safe-haven demand for gold.

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