As the chart from Reuters shows, gold has outperformed all the major asset classes this year.
Most explanations for these results point to the various geopolitical risks that have generated jitters across a number of markets. However, there is another explanation. Expectations that monetary policy will remain loose across major economies longer than originally anticipated have been driving gold higher. Here are some key indicators supporting this thesis:
1. As discussed earlier (here), China's monetary policy continues to be quite supportive for credit expansion.
2. Japan's growth will likely fall short of the BOJ's projections (see chart), prompting the central bank to accelerate QE or at least maintain it over a longer period. Credit Suisse: "We see additional BoJ easing coming in November."
3. The Australian unemployment rate has been considerably higher than expected (see chart), suggesting that the risk to RBA rates is to the downside (or at least low for a longer period of time).
4. Economic reports from the euro area continue to point to a slowdown (chart below), and while the ECB is unlikely to undertake outright QE or other such measures, the expected period of accommodation has clearly been extended. This is particularly true with inflation rates in a number of member states at dangerously low levels (see chart).
ZEW Indicator, August 2012-Present
|Source: Centre for European Economic Research (ZEW)|
5. While the US recovery remains stable and the Fed continues to taper securities purchases, the "effective" monetary policy has become looser than it was a year ago. One can gauge this by looking at longer-term real (as opposed to nominal) rates. The 10-Year real rates in the US for example have been declining, now below 20bp. That is clearly an accommodative trend.
6. Even in the UK where we had some saber rattling from the BOE about potentially raising short-term rates in 2014, real yields of government bonds remain deep in negative territory across the curve.
The level of monetary accommodation in the world's major economies remains quite high, with little indication of near-term withdrawal. That has provided substantial support for gold prices and may continue to do so in the near future.