Central Banks Are the Fall Guys

For decades, the freedom of monetary policymakers to make difficult decisions without having to worry about political blowback has proven indispensable to macroeconomic stability. But now, central bankers must ease monetary policies in response to populist mistakes for which they themselves will be blamed.

Raghuram G. Rajan


CHICAGO – Central-bank independence is back in the news. In the United States, President Donald Trump has been berating the Federal Reserve for keeping interest rates too high, and has reportedly explored the possibility of forcing out Fed Chair Jerome Powell. In Turkey, President Recep Tayyip Erdoğan has fired the central-bank governor. The new governor is now pursuing sharp rate cuts. And these are hardly the only examples of populist governments setting their sights on central banks in recent months.

In theory, central-bank independence means that monetary policymakers have the freedom to make unpopular but necessary decisions, particularly when it comes to combating inflation and financial excesses, because they do not have to stand for election.

When faced with such decisions, elected officials will always be tempted to adopt a softer response, regardless of the longer-term costs. To avoid this, they have handed over the task of intervening directly in monetary and financial matters to central bankers, who have the discretion to meet goals set by the political establishment however they choose.

This arrangement gives investors more confidence in a country’s monetary and financial stability, and they will reward it (and its political establishment) by accepting lower interest rates for its debt. In theory, the country thus will live happily ever after, with low inflation and financial-sector stability.

Having proved effective in many countries starting in the 1980s, central-bank independence became a mantra for policymakers in the 1990s. Central bankers were held in high esteem, and their utterances, though often elliptical or even incomprehensible, were treated with deep reverence. Fearing a recurrence of the high inflation of the early 1980s, politicians gave monetary policymakers wide leeway, and scarcely ever talked about their actions publicly.

But now, three developments seem to have shattered this entente in developed countries. The first development was the 2008 global financial crisis, which suggested that central banks had been asleep at the wheel. Although central bankers managed to create an even more powerful aura around themselves by marshaling a forceful response to the crisis, politicians have since come to resent sharing the stage with these unelected saviors.

Second, since the crisis, central banks have repeatedly fallen short of their inflation targets.

While this may suggest that they could have done more to boost growth, in reality they don’t have the means to pursue much additional monetary easing, even using unconventional tools.

Any hint of further easing seems to encourage financial risk-taking more than real investment.

Central bankers have thus become hostages of the aura they helped to conjure. When the public believes that monetary policymakers have superpowers, politicians will ask why those powers aren’t being used to fulfill their mandates.

Third, in recent years many central banks changed their communication approach, shifting from Delphic utterances to a policy of full transparency. But since the crisis, many of their public forecasts of growth and inflation have missed the mark.

That these might have been the best estimates at the time convinces no one. That they were wrong is all that matters. This has left them triply damned in the eyes of politicians: they failed to prevent the financial crisis and paid no price; they are failing now to meet their mandate; and they seem to know no more than the rest of us about the economy.

It is no surprise that populist leaders would be among the most incensed at central banks.

Populists believe they have a mandate from “the people” to wrest control of institutions from the “elites,” and there is nothing more elite than pointy-headed PhD economists speaking in jargon and meeting periodically behind closed doors in places like Basel, Switzerland. For a populist leader who fears that a recession might derail his agenda and tarnish his own image of infallibility, the central bank is the perfect scapegoat.

Markets seem curiously benign in the face of these attacks. In the past, they would have reacted by pushing up interest rates. But investors seem to have concluded that the deflationary consequences of the policy uncertainty created by the unorthodox and unpredictable actions of populist administrations far outweigh any damage done to central bank independence. So they want central banks to respond as the populist leader desires, not to support their “awesome” policies, but to offset their adverse consequences.

A central bank’s mandate requires it to ease monetary policy when growth is flagging, even when the government’s own policies are the problem. Though the central bank is still autonomous, it effectively becomes a dependent follower.

In such cases, it may even encourage the government to undertake riskier policies on the assumption that the central bank will bail out the economy as needed. Worse, populist leaders may mistakenly believe the central bank can do more to rescue the economy from their policy mistakes than it actually can deliver. Such misunderstandings could be deeply problematic for the economy.

Furthermore, central bankers are not immune to public attack. They know that an adverse image hurts central bank credibility as well as its ability to recruit and act in the future.

Knowing that they are being set up to take the fall in case the economy falters, it would be only human for central bankers to buy extra insurance against that eventuality. In the past, the cost would have been higher inflation over the medium term; today, it is more likely that the cost will be more future financial instability. This possibility, of course, will tend to depress market interest rates further rather than elevating them.

What can central bankers do? Above all, they need to explain their role to the public and why it is about more than simply moving interest rates up or down on a whim. Powell has been transparent in his press conferences and speeches, as well as honest about central bankers’ own uncertainties regarding the economy.

Shattering the mystique surrounding central banking could open it to attack in the short run, but will pay off in the long run. The sooner the public understands that central bankers are ordinary people doing a difficult job with limited tools under trying circumstances, the less it will expect monetary policy magically to correct elected politicians’ errors. Under current conditions, that may be the best form of independence central bankers can hope for.

Raghuram G. Rajan, Governor of the Reserve Bank of India from 2013 to 2016, is Professor of Finance at the University of Chicago Booth School of Business and the author, most recently, of The Third Pillar: How Markets and the State Leave the Community Behind.

Profoundly low interest rates are here to stay

Investors and policymakers must recalibrate their assumptions on capital and investment

Robin Harding

This will be a discomforting, defining week for the global economy. That is not because the US Federal Reserve is set to cut interest rates. Rather it is because of the strikingly low level of rates from which the Fed will start: a range of just 2.25 to 2.5 per cent.

After more than a decade of economic expansion, and despite everything from tariffs to tax cuts, it seems this is as high as US interest rates go. Meanwhile, the European Central Bank is debating whether to reduce its negative rate still further. Until this month, it was possible to imagine that pre-financial crisis levels of 4 to 5 per cent might eventually return. No longer.

According to their own projections, Fed officials believe rates will settle at 2.5 per cent in the long run. Subtract their 2 per cent inflation target and the real reward for capital is going to be a miserable 0.5 per cent. The equivalent rate in Europe and Japan will almost certainly be much lower. Such low levels of interest rates are a profound change from the past. (The federal funds rate was 6.5 per cent, and the real rate was about 4 per cent as recently as 2000.)

Although interest rates touch almost every aspect of economic life, the developed world remains deep in denial about the consequences. Here are eight themes for investors and policymakers to ponder.

First, there is an intimate link between long-run interest rates and long-run economic growth. Perhaps capital is less relevant to the digital economy, but for interest rates to max out at such low levels sends an alarming signal about the prospects for future expansion.

Second, monetary policy is broken. In 2008-09, the Fed cut rates by 5 percentage points and it was not enough. Today it has far less room to respond to a recession. The Bank of Japan, which made no move on Tuesday, has all but given up trying to hit its 2 per cent inflation target. The ECB is in danger of going the same way. The world is dismally unprepared for a downturn: two of the world’s most influential central banks may start the next recession with their policy rate already below zero.

Third, if monetary policy is broken, fiscal policy must step in. That means either governments must approve higher spending and tax cuts in response to a recession or else give the central bank a fiscal tool in the form of “helicopter money”, essentially printing money to spend or distribute to the public. Alternatively, governments could set higher inflation targets and use fiscal policy to reach them now. That would give their central banks more room to cut when they need it.

Fourth, lower interest rates make debt more sustainable. This is particularly true for public debt, because countries actually borrow at these low risk-free rates, and somewhat true for private debt. For many countries, it makes sense to borrow more in order to invest. Predictions of financial crisis based on past levels of debt-to-gross domestic product are likely to be misleading.

Fifth, capital stock should rise relative to output. Investments that were once unprofitable now make sense: road upgrades to save a few minutes of time; expensive, niche drugs to help a few hundred people; or extra years of study to earn a graduate degree. Such projects may feel irrational. They are not.

Sixth, any asset in fixed supply is now more valuable, because its future cash flows can be discounted at a lower rate. A monopoly supplier of water or electricity, land in a city centre or the back catalogue of Disney: the capital value of these assets must rise, so their yield matches the lower interest rates. This trend is related to recent movements in wealth inequality. It also puts investors at risk of identifying financial bubbles that do not actually exist. One vital policy response would be to slash the return on capital allowed to utilities.

Seventh, demand for housing will rise. It is, after all, the main capital asset that most people use. There are two potential outcomes. Where it is possible to build, permanently lower interest rates will trigger an increase in the housing stock. If it is not possible to build, then houses will behave like assets in fixed supply, and soar in price. Thus falling interest rates make planning and zoning rules a crucial economic issue.

Eighth, low interest rates make it harder to save. In particular, they make it harder to save for a pension, and harder to live off whatever capital accumulates. This fact has been obscured by the one-off rise in price for scarce assets, many of which are owned by pension funds. But future returns are likely to fall. The result will force workers to accept some combination of later retirement, higher taxes, bigger pension contributions or lower incomes in old age.

It is possible that this bout of low interest rates will end. Perhaps the Fed is mistaken and it will have to raise rates sharply in the future. Perhaps a burst of technological progress will raise growth and boost demand for capital.

But no one can choose to make that happen: this is not some perverse plot by Fed chair Jay Powell and ECB president Mario Draghi to make life miserable for the world’s savers. The long-run real interest rate balances the desire to save and demand to invest. Central banks are its servants not its masters.

The trend towards lower real interest rates has lasted for decades and is as likely to continue as to reverse. With central banks moving to ease, it is time to stop waiting for rates to recover and face the world as we find it.

Trump Kills the Tea Party

By: Peter Schiff

After claiming to be the greatest at just about everything, Donald Trump has finally found an area where he can stake a credible claim. By negotiating a disastrous budget deal with Democrats, the President could become the greatest creator of government debt in the history of the country. While Trump is selling the two-year deal as a major victory because it increases military spending and removes the possibility of a government shutdown for two years, in reality, the agreement to suspend the debt ceiling and push annual deficits even further above the trillion dollar mark may only succeed in destroying the Republican Party as we know it.

The Tea Party wave of 2009 and 2010, a Republican movement born in reaction to the budget blowouts of the Obama Presidency, is now officially dead. It’s ironic that as Trump hammered the final nail into the Tea Party’s coffin, no one seemed happier than the corpse itself! There was hardly a word of discomfort from all the Republican Senators and Congressmen who had so loudly railed against debt when the other party occupied the White House. There is simply no legitimate way that Republicans will ever be able to argue again that they are the party of fiscal discipline. They may try, but only the most partisan and credulous voters will buy it.

CNBC’s Rick Santelli, the unofficial godfather of the Tea Party, should at least speak a few words at its funeral, and perhaps take the opportunity to reconsider his admiration for the man who murdered it. But don’t hold your breath. Trump has accomplished something Obama never could: convincing Republicans to abandon any remaining conservative principals to support massive increases in the size of government, without any regard for how much money will have to be borrowed to make it possible!

As I laid out in a commentary I wrote just before Trump took office in January of 2017, Republican bona fides on the issue of fiscal responsibility were never that strong to begin with. In fact, deficits have tended to expand faster under Republican presidents. Given the reputation of each party this may strike some as a surprise. But it makes sense when you consider the politics.

In short, here’s how the two parties operate: Democrats promise to raise spending and raise taxes, Republicans promise to cut spending and cut taxes. But, whereas Democrats have generally succeeded in both of their aims when they have power, Republicans have just succeeded in cutting taxes BUT NOT spending. (spending cuts require politically difficult choices that are much harder to vote for than perennially popular tax cuts). This puts a giant thumb on the Republicans’ budgetary scale.

Unlike prior Republicans, Trump never so much as paid a single word of lip service to spending cuts. As the self-proclaimed “King of Debt,” in the private sector Trump never had any problems borrowing more than he could reasonably be expected to pay back, as long as there was an opportunity to renegotiate with his creditors in the long run. Individually, he has been repudiating debt (largely without consequence) for the past 40 years, so why would anyone expect him to stop now?

But deficits under Trump have expanded even faster than I had expected. The really alarming part is that this occurred with GDP growth higher than I anticipated, and without the additional red ink of a $1 trillion plus infrastructure spending plan that I had assumed would pass in the first two years of his presidency. If the economy slows significantly, as I suspect it will in the near term, we may see annual deficits in the multi-trillion dollar range almost immediately. Republicans and Democrats may be inclined to think that deficits of that size won’t matter either, but I suspect that they will.

Donald Trump won the 2016 election in part by casting doubt on the strength of the Obama economy. At the time, most in the media and on Wall Street were united in their belief that prosperity had increased impressively from the depths of the 2008-2010 Recession. They believed that the strength was particularly evident during Obama’s second term when interest rates and unemployment fell to generational lows, and the stock market soared to all-time highs. Given the media’s love affair with Obama, it’s not surprising that the narrative was not heavily scrutinized.

But Trump correctly sensed that the good times were not being felt by the vast majority of working-class Americans. He argued that Obama and the Fed conspired to create a “phony” recovery by keeping interest rates artificially low. The result was a “big, fat, ugly, bubble”, as he declared in the first presidential debate in 2016, that disproportionately benefited the wealthy, and that set the stage for a crash once the bubble burst. To fix the problems, Trump prescribed a regimen of tax cuts, regulatory relief, and tough trade policies.

As it turned out, Trump was right about the underlying economic fragility, and I praised him at the time for having the independence to go against the grain. The ultralow interest rates and quantitative easing that had been in place since the Great Recession had in fact benefited the wealthy more than the working classes. That’s because low interest rates are effective at pushing up asset prices (like those in the stock, bond and real estate markets), but appear to be ineffective at creating lasting benefits in the broader economy. And since the rich are more likely to own stocks, bonds, and real estate, they are more likely to benefit from Fed rate reductions.

In contrast to Trump’s economic populism, Hilary Clinton’s main message was that the best way to keep the Obama economy going would be to stay the course and elect her. Trump won that rhetorical battle in a few swing states and became President.

However, once he took office, the bubbles in stocks and bonds just got larger and larger. But as President, he fully embraced them. Despite the fact that few of the major economic trends have significantly altered course in the transition from Obama to Trump, the President asserts that the economy is currently the “best in our history” and that there are no bubbles in site. This fact-free position has encouraged him to wade into a truly bizarre rhetorical paradox (one that would intimidate mere mortals). While insisting that the economy is in fantastic shape he is simultaneously calling on the Fed to slash interest rates from their historically low levels. If the economy were so strong, why would it need that kind of emergency help?

But the numbers don’t really support Trump’s bluster about a bulletproof economy. If the economy were so strong, why did the June Richmond Fed Manufacturing Index not only miss expectations, but tumble to its lowest level in over six years? Why did the June Chicago Fed National Activity Index just fall for the seventh consecutive month, its worst losing streak since the Great Recession?

Weakness in the housing market has also been well documented, despite the generationally low interest rates that should be greasing the skids. Not only did June existing home sales miss expectations, but annual sales have fallen for 16 consecutive months, according to data from National Association of Realtors. If sales are this weak despite falling mortgage rates and “the strongest economy in history,” imagine how much weaker sales would be if mortgage rates rise and the economy slows. According to 2016 data from the U.S. Census Bureau, the homeownership rate for African Americans has already fallen to generational lows. How much longer before the same may be true for the general population?

As we move into the thick of the 2020 presidential cycle, the roles of booster and critic have reversed. While this is generally true in every election, this time the flip-flops can’t be any more egregious. Elizabeth Warren made news this week by issuing a lengthy warning that America’s economy is built on a dangerous foundation of soaring debt. She drills down into the ugly reality of bubbles in student and corporate debt, and laments the continued decline of our manufacturing sector. She concludes that despite the happy talk from Washington and Wall Street, we are headed for another economic crash.

As it so happens, the Senator is right (something that doesn’t happen often). Working class voters may feel just as left out in 2020 as they did in 2016. If the pitch worked for Trump then, maybe it work for Warren, or any Democratic nominee, now?

However, the two differ substantially on solutions. Whereas Trump favored largely pro-business remedies, Warren believes that only government has the wisdom and ability to save the economy. If she has a chance to implement her socialist policies, the economy may never recover.

The recent budget developments should make it perfectly clear that there is no resistance to the trend of budgetary catastrophe. It doesn’t matter who wins elections. Another debt crisis may just be unavoidable. The dollar should be tanking and bond investors fleeing. But of course, traders and investors can only look at seemingly benign short-term effects of massive deficit spending, and the temporary aversion of a messy fiscal crisis. This willful ignorance will cost us in the long term.

Gold initially sold off a bit on the deal due to the relief that a government shutdowns in the next two years have been averted. But the suspension of the debt ceiling, the repeal of prior efforts to restrain spending, and reckless expenditures on both welfare and warfare may make gold an even better buy post deal than before.

In the coming years, multi-trillion dollar annual deficits could be the norm, until we start measuring the numbers by the tens of trillions. This merry-go-round will keep spinning until the ride crashes. There will be no cavalry to ride to the rescue. The deficit hawks in the Republican Party have all joined the other side. While this may make things easier for the politicians, it will make things much harder for the public.

Global trade was slowing down before the tariff war started

Since the crisis, financing has become much more costly

Gillian Tett

At the start of the previous decade global trade was growing at almost 8% a year, but this year it is expected to rise by just 2.6% © Bloomberg

What the heck is happening to global trade? This is a question G7 finance ministers and central bankers might have asked as they met in Chantilly in France this week.

At the start of the previous decade, global trade was growing at almost 8 per cent a year, twice the pace of growth in gross domestic product. This year, however, the World Trade Organization expects trade to rise by a mere 2.6 per cent — the same as projected global GDP growth.

Unsurprisingly, this turnround has sparked hand-wringing about the cost of the current trade wars. Indeed, G7 ministers have pointed to this as evidence that protectionism could spark a wider global economic downturn.

But amid this entirely understandable concern, there is one crucial detail that is overlooked: the slowdown in trade started well before the recent eruption of protectionism. That suggests we cannot blame our current woes on the trade wars alone — although protectionism is, of course, worth fighting against.

The issue at stake was set out on Tuesday by Hyun Song Shin, chief economist of the Bank for International Settlements, at a meeting of senior finance officials organised by the Banque de France in Paris.

Mr Shin started by noting that there are several ways to track trade. The metric commonly used is absolute real or nominal trade. There is, however, another: the ratio of gross exports to net GDP. And the latter metric is particularly revealing right now, since it indicates the activity of cross-border global supply chains, or “global value chains”, as economists prefer to say. Complex GVCs generate multiple export “sales” — and the more extensive these chains are, the higher is that gross export number relative to GDP.

This gross exports series shows that between 2000 and 2008 there was a frenzy of activity in global supply chains. Indeed, as Mr Shin explained, gross exports relative to GDP exploded by a cumulative 16 per cent, due to intense supply chain activity between China and the west.

However, when the 2008 financial crisis hit, gross exports crumbled. No surprise there, perhaps. But what is more remarkable is that, while gross exports recovered in 2009, they have never returned to anything like the pre-2007 figure. More striking still, since 2011 gross exports have steadily declined relative to GDP — meaning, Mr Shin noted, that “the slowdown in trade predates the retreat into protectionism and trade conflicts in the last couple of years”.

Why? One explanation might be that services are becoming more important in the global economy than manufacturing. Another might be technological innovation: automation has cut the cost of western manufacturing, reducing the need to outsource production to low-wage locations such as China.

However, Mr Shin thinks another crucial — and overlooked — factor is finance. Companies need hefty amounts of working capital to run their supply chains, and about two-thirds of this typically comes from their own resources, with the other third coming from bank and non-bank finance.

During the pre-2007 credit boom it was easy for companies to find working capital and trade finance. But, since then, the crisis banks have reined this in. This is partly because post-crisis regulations have made it more costly for western banks to supply such funding, but also because banks’ resources have been hit by the debilitating impact of ultra-low interest rates and the flattening yield curve.

Currency swings also hurt. About 80 per cent of trade finance is supplied in dollars, and trade invoicing tends to be dollar-based, too. This means that dollar strength tends to affect the ability of companies in emerging markets to finance supply chains.

Now, it is highly unlikely that this subtle message about the role of finance will gain much attention from politicians, let alone voters. However, if Mr Shin’s analysis is correct (as I think it is), it has at least three important implications.

First, it underscores the importance of studying financial channels in tandem with “real” economic trends if you want to understand the global economy. Second, the research suggests that the pre-2007 credit bubble not only created a house price boom, but also helped create a trade and GVC bubble, too.

Third, insofar as this bubble has now burst, it seems unrealistic to expect that the world will recreate that global trade surge anytime soon — even if, by some miracle, the US and China suddenly end the trade war. This is not a comforting message. But it is the new reality to which the G7 has to adapt.

4 Reasons Why Gold Will Continue To Shine

by: Andrew Hecht

- A bullish reversal.

- Reason one: Central bank policy and buying. 

- Reason two: Currency devaluation around the world.

- Reason three: The long-term chart.

- Reason four: Uncertainty - UGLD on dips in a bull market will turbocharge returns.

My introduction to working in the commodities market came during the summer of 1977, when I worked delivering telex messages at the leading raw materials trading company in the world. In the days before email and computers, telexes or cables connected the traders and traffic clerks with counterparts all over the planet.
Most of the departments were set up with traders sitting in private offices and the traffic personnel in cubicles nearby. The traders did the buying and selling, while the clerks shipped the materials from points of production to consumption. The precious metals trading department was different. Gold and silver had just started trading on the COMEX futures exchange in the US in the mid-1970s. While the other trading departments were quiet, the precious metals traders stood with a phone in each ear, and the blaring sound of prices coming from squawk boxes from the floor of the exchange. Philipp Brothers traded precious metals around the clock on business days with offices in New York, London, and Hong Kong.
Precious metals trading was the hub of excitement at the firm. Little did I know that a little over a decade later, I would be in charge of that worldwide department. I grew up in the gold market, and over the recent weeks, the yellow metal has become exciting once again.
The VelocityShares 3X Long Gold ETN product (UGLD) turbocharges the price action in gold on the upside. In a runaway bull market, UGLD would be an explosive asset.
A bullish reversal
The week of July 29 was a busy time in markets across all asset classes. After the Fed disappointed markets with a 25-basis point cut, and less than dovish comments by the Chairman of the central bank on July 31, the price of gold dropped to just above the $1400 per ounce level.
Source: CQG
The weekly chart shows that the price of gold fell to a low at $1400.90 on August 1, the day following the Fed meeting. On that day, President Trump decided to slap another 10% tariff on $300 billion of Chinese goods to the United States. Once again, the US President became frustrated with the pace of the trade negotiations when his team was in Shanghai last week. The news on trade lit a bullish fuse under the gold market.
The Fed cited "uncertainty" and "crosscurrents" caused by trade as a reason for the first rate cut in over a decade. The development in trade on August 1 was a sign that more declines in the short-term Fed Funds rate are now more likely. Uncertainty rose just one day after the July FOMC meeting.
Gold put in a bullish reversal on the weekly chart during the week of July 29. The price fell to a
lower level than the previous week and closed above the prior week's peak on the highest level of volume in 2019 and since the beginning of 2018.
The bullish reversal gave way to more buying during the week of August 5, even a higher level of volume on a combination of the technical pattern from the previous week and Chinese retaliation on trade. China devalued its currency and canceled purchases of US agricultural products. The situation that was formerly a trade dispute is now looking like a full-fledged trade and currency war.
Four factors are telling me that gold will continue to shine after the recent series of new highs. I believe that the yellow metal is now heading for a new all-time peak after breaking out to the upside in June.
Reason one: Central bank policy and buying
Global central banks continue to follow an accommodative path when it comes to monetary policy, and the escalation of the trade dispute will only exacerbate the dovish policies.
Last week, the US Fed cut the Fed Funds rate for the first time in over a decade. Moreover, the world's leading central bank ended the program of balance sheet normalization one month early. The end of quantitative tightening takes the upward pressure off US rates further out along the yield curve. The trade war is likely to cause rates to drop before the end of 2019.
Chairman Powell told markets that the move on July 31 was not the start of a prolonged period of rate cuts. The deterioration in relations between the US and China could make him eat those words.
Before we heard from the Fed, the European Central Bank told the world that rates are moving lower and quantitative easing will make a return because of the sluggish economic conditions in the eurozone. The Brexit deadline is on October 29. The new British Prime Minister says that he intends to take the UK out of the EU with or without an agreement. Uncertainty in Europe will rise over the coming weeks.
The second-largest economy in the world belongs to China. The devaluation of the yuan is another accommodative factor facing the world. The bottom line is that the world's central banks continue to provide stimulus, which is rocket fuel for the price of gold.
At the same time, the world's central banks continue to be net buyers of gold. While they rarely talk about the yellow metal, they continue to increase holdings. Gold is the ultimate reserve currency, which is why the IMF includes gold as part of a nation's foreign currency reserves.
Reason two: Currency devaluation around the world
If you have any doubt that currencies are losing value since the early 2000s, look at charts of any foreign exchange instrument versus the price of gold.
Source: CQG
After dropping to a low at $255 per ounce in 2001 as the Bank of England sold half of its gold reserves, the price of the yellow metal has been in a bullish mode. Gold took off to the upside and rose above the $1000 level for the first time in 2008, and it has not traded below that level since 2009. Gold rose to a peak at $1920.70 in 2011 and then consolidated between $1046.20 and $1377.50 from 2014 through 2019. In June, gold broke to the upside in what could be the start of the next leg to the upside on the way to challenge the 2011 peak. At the $1505 level on the continuous futures contract on August 12, gold was around 21.6% below its record high.
Source: CQG
The monthly chart of gold in euro currency terms shows that the price has also been in a bull market since the early 2000s. At 1338 euros per ounce on August 12, the price of gold was 2.8% below its all-time high from 2012 at the 1377 level. In Swiss francs, the price of gold was at the 1454.50 level on August 5, 12.5% below its record high at 1662.50 in 2012. Gold has already risen to a new all-time high at just over 1245 British pounds per ounce.
Source: CQG
The Japanese yen is another leading reserve currency in the world. In yen terms, the price of gold has rallied to the 158,180 level, which is a new record high above the previous high from 2013 at 152,457 yen per ounce. The recent devaluations in the Chinese yuan have put the price of gold in the Chinese currency at a record level. Gold is also at a new high in Australian and Canadian dollars and most other fiat currencies around the globe.
Gold's rise in all currency terms is a comment on the value of fiat foreign exchange instruments. The trend in all currencies is a fundamental validation of the bull market in the yellow metal as the faith and credit of legal tender decline.
Reason three: The long-term chart
The semi-annual chart of gold displays a bullish path of gold in US dollar terms, now that the yellow metal has broken out of its five-year consolidation pattern above the $1377.50 level.
Source: CQG
The long-term chart shows that both price momentum and relative strength indicators are rising at the upper regions of neutral territory, leaving more upside potential for the price of gold. Open interest, the total number of open long and short positions in the COMEX gold futures market, has been rising with the price of the precious metal.
In a futures market, growing open interest and the increasing price are typically a technical validation of a bullish trend. Finally, at 15.18%, semi-annual historical volatility is perfectly positioned for gold, which is a hybrid between a currency and a commodity.
The measure of price variance is higher than most world foreign exchange instruments, but it is lower than most raw material markets. At the 15% level, there is no reason why the rally cannot continue to carry the price of gold to the 2011-high.
Reason four: Uncertainty - UGLD on dips in a bull market will turbocharge returns
Finally, the Fed cited "uncertainty" as a reason for cutting the Fed Funds rate and ending its quantitative tightening program on July 31. Uncertainty in the world is an understatement these days.
The trade war between the US and China has taken the center of the stage this week and threatens to destabilize the global economy. In Asia, North Korea remains a potential problem as President Trump and Chairman Kim have done little but exchange pleasantries and love letters. In Europe, Brexit is coming soon, and Prime Minister Boris Johnson has said he is prepared to leave the EU without any agreement.
A hard Brexit could cause confusion and contagion to ripple across markets around the world.
And, the UK is not the only problem facing Europe these days on the political and economic fronts. In the Middle East, US sanctions on Iran have increased the potential for hostilities in the region that is home to over half the world's oil reserves. In the United States, perhaps the most contentious Presidential election in history will take place in November 2020.
The world has been volatile throughout history. However, the temperature has been climbing over the past months, and all signs point to at least a few crescendos that will increase fear and uncertainty. On August 5, the US stock market fell sharply and we could be at the start of a risk-off period in markets across all asset classes.
Gold is a safe-haven, and if its price is going to begin to climb rapidly in dollar terms, the VelocityShares 3X Long Gold ETN product is likely to act like the yellow metal on steroids. On August 1, the price of gold fell to a low at $1400.90 and on August 7 it rose to a high at $1509.90 on the continuous futures contract, a rise of 7.78%. UGLD has net assets of $153.31 million.
While the ETN trades an average of 145,485 shares each day, UGLD charges an expense ratio of 1.35%.
The product offers leverage, which comes at a price. If the price of gold moves lower or goes sideways, UGLD's value will evaporate rapidly.
Source: Barchart
The price of gold futures rallied by 7.78% from August 1 through August 7. UGLD moved from $117.02 to $145.44 over the same period. The appreciation of 24.29% was just over triple the percentage move in the gold market.
UGLD can be a useful tool if the bull is going to continue to charge higher in the gold market. A look around the world tells us that gold is one asset that will continue to climb.
In high school, I first walked into the precious metals trading room that I would eventually run.

Gold has been in my blood for over forty years, and I have never seen the stars line up for the metal as it has in the current environment.