The 2016 Economic Symposium in Jackson Hole may set the policy stage for the coming years. What should we expect for the gold market?

Understandably, Yellen’s speech attracted the most investors’ diligence from the Jackson Hole Economic Symposium. However, there were many other interesting commentaries made in Wyoming by prominent central bankers and academics. We would like to draw investors’ attention to two issues, very characteristic in the current debate about the future policy mix.

First, Marvin Goodfriend, professor at Carnegie Mellon University, presented a paper entitled meaningfully “The Case for Unencumbering Interest Rate Policy at the Zero Bound”. He basically calls for removing any obstacles for introduction the negative nominal interest rates as a realistic policy option in a future crisis. Goodfriend analyzes three methods to achieve such a noble purpose, including abolishing paper currency.

This proposition talks a lot about the mentality of Goodfriend, but next paragraphs are even better. He believes that “removing the zero lower bound is nothing more than the sensible application of monetary economics”. Isn’t that hilarious? It’s like saying that breaking the light barrier is nothing more than the sensible application of physics. Actually, according to some ideas, being faster than light could be possible, but why the heck anyone should lend money at negative rates? But let’s move to the next interesting sentence: “It is only a matter of time before another cyclical downturn calls for aggressive negative nominal interest rate policy actions”. We may laugh at academic economists, but the truth is that they set the tone of current discussion about the future central bank’s toolkit. Hence, gold investors should be aware that NIRP may be used when the next recession will strike.

Second, Benoít Coeuré, member of the Executive Board of the ECB, gave a speech about the ECB’s operational framework in post-crisis times. What brought our attention are his concluding remarks:

“The ECB’s operational framework and its monetary policy strategy are robust and sufficiently flexible to deal with the current challenges. We will fulfill the price stability mandate given to us by the Treaty. But if other actors do not take the necessary measures in their policy domains, we may need to dive deeper into our operational framework and strategy to do so.”

Other actors are of course governments responsible for fiscal policy. In other words, Coeuré’s speech fits well into the growing chorus of voices calling for the decisive and expansive fiscal action. Yeah, it’s really great advice for indebted governments: “monetary madness is ineffective, so we need now just some fiscal irresponsibility. Please, just spend money like crazy, because when we do it purchasing assets, it does not help”.

The key takeaway is that there is a growing belief that the current monetary policy is ineffective in stimulating economy. We may say that the new policy orthodoxy is emerging, as more and more people are calling for either more unconventional monetary measures, such as NIRP, or for aggressive fiscal action. Both options, if introduced, would be supportive for the gold market, at least initially, as they would spur safe-haven demand for gold. However, so far, the Fed is thinking about tightening, not easing, therefore the yellow metal may remain under downward pressure in the short-term.

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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