Gold Price – What’s driving it?

There has been little consensus about ‘one thing’ that caused the big jump last week and why it is staying firm.  There were however a few things that happened around last Thursday.  Firstly we talk often about the unintended consequence of rampant money printing can be losing control of inflation.  Gold loves inflation (check out the graph below). 

Last week the US CPI shocked everyone by coming in well above expectations and surpassing the Fed’s ‘target’ of 2%.  At 2.1% it was the first time above 2% since October 2012 and there is growing commentary about whether this will keep going.  Keep in mind that, like Australia, the US has changed the way they calculate CPI over the years to mask the real story.  On the 1980 methodology it would really have been just under 10% and on 1990 methodology just under 6% (ref ShadowStats.com).  

Secondly, the Fed Chair Yellen gave yet another very ‘dovish’ speech that near zero interest rates are here for a long time yet despite meeting their target unemployment figure (because of a 30 year low participation rate, not new jobs) and inflation.  They know the real US economy is still sick and needs more cheap money to try and revive it.  

Thirdly, tensions in Iraq escalated and ceasefires in Ukraine were immediately breached.  Also tensions between China and Japan are still high over the Senkaku/Diaoyu islands in the East China Sea and the China v Vietnam oil rig dispute are all leading to more geopolitically fuelled safe haven buying of gold.  Finally we are now in late June and near the traditional ‘turning point’ in the seasonal buying pattern of gold.  The second half of the year (from about mid July) has historically been much stronger for gold than the first (check out the second graph below).  None of the above are ‘flash in the pan’ events and may well see a continuation of this price action.