E Is Gold An Economic Accelerator?

Negative Real Interest Rates are the Economic Stimulant

Ironically then, one of the biggest factors affecting the price of gold is the U.S. federal reserve. They make an estimate of future inflation and then decide on an interest rate policy. If their  interest rate plan is lower than the forecasted inflation rate, gold and many other assets will increase in value. This is considered an accommodative or simulative policy. This action could also be considered an accelerant. If their interest rate plan is to be higher than inflation, then asset prices will decline. This could be considered the economic equivalent of putting on the brakes. With this analogy, therefore, the price of gold can be considered a proxy for the amount of stimulation in the system. A low price of gold indicates low stimulation, while a high price for gold indicates high stimulation.

Is Gold over $1000 an Economic Accelerator?

As you can see from the above, the price of gold goes up when investors think that interest rates will go below the rate of inflation and real interest rates will go negative. (This can happen in times of inflation or deflation.)  The further negative the real rates go, the higher the price of gold.  From general observations, it could be reasonable to assume that the neutral rate for gold could be around $1000 USD. That means that if the real interest rate were zero (no accelerant or brakes), the price of gold would be $1000 USD. If real interest rates go up (brakes), gold would go below $1000. If real interest rates go negative (accelerant) then gold would go over $1000. So although gold does not really accelerate the economy, it can be a reliable indicator of how much stimulant or “accelerant” is being applied to the market. A scenario including extreme global deflation could require a lot of stimulation or “accelerant” from governments or central banks. This could be in the form of real interest rates in the range of negative two or three or even four percent. At minus three or four percent, gold could skyrocket to three or even four thousand dollars per ounce. At these prices, gold would certainly be a very visible and obvious indicator.

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Comments

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Linda Willis 3 months ago Member's comment

Good article. How do you feel about #gold with everything that's been going lately?

Mike Verge 3 months ago Author's comment

Hi Linda,

Since the amount of gold in the world is essentially fixed, the more money they print, the less each dollar is worth versus gold. So each dollar is being devalued versus gold.

Gold will stop going up when the central bank stops printing money and devaluing the dollar.

I don't see that happening soon. Do you?

Thanks for the feedback.

Mike

Linda Willis 3 months ago Member's comment

No I don't either. If anything I think #gold is an excellent safe haven during all times of uncertainty, including right now.