When we are looking at the broader activity in the financial markets over the last year, we can see that gold has consistently performed as one of the most bullish assets in the commodities space. There are several reasons that can be used to explain why this has occurred, but it could be said that the most important factor continues to be the monetary policy course that has been established by the US Federal Reserve.
The tone that has been set by Janet Yellen and her contemporaries has been one of measured hawkishness, and the latest decision to leave interest rates unchanged in the world’s largest economy was not surprising for most of the analysts that operate in the commodities markets. Generally speaking, an environment of rising interest rates tends to create obstacles for bull runs in gold and silver. But when we look deeper into the policy statements that have been made by the Fed over the last six months, we can see that the clear reluctance to raise interest rates should continue to create a supportive base for those trading in precious metals.
Growth Weakness in GDP
These factors create a series of positives for those that are already long gold, either in physical assets (like gold coins or gold bullion) or in ETFs like the SPDR Gold Shares (NYSE:GLD). But if you are looking for ways of gaining new exposure to these types of assets, it will continue to be important to watch the same economic data that is used to support the assertions of the voting members at the Federal Reserve.
In the chart above, we can see that US GDP growth has made steady declines since the end of 2014. This has made it very difficult for the Fed to start normalizing its interest rate policy, as any additional tightening could threaten to slow the economy even further. The latest GDP report shows a growth rate of only 1.1%, so there is not much room for the Fed to act in altering policy in a more hawkish way.
Conventional wisdom suggests that the Fed is really looking at the labor markets in order to get its cues on which policy direction to pursue. There is still some truth to this, to be sure, but the broader GDP measure will likely be a better indicator of whether or not the US economy is actually ready to sustain itself under higher interest rate levels.
Rallies in Physical Gold
On the asset side of things, investors should continue to monitor global demand activity in physical gold markets. This tends to be one of the best ways of assessing where the true trends in precious metals markets are likely to travel. Assets like GLD (NYSE:GLD) tend to get most of the headlines in the financial news media but it is important to remember that this is simply an indirect way of measuring the price of precious metals assets. Market activity in physical gold is often the real leader in where the majority is headed so anyone that is looking to gain exposure to these sections of the market should have a firm grasp of what is happening to valuations in gold coins, gold bars, and gold bullion.