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The Hard Assets Alliance Blog

Staying the Course For Now…What This Means For Gold

In her first hearing as Chair of the Federal Reserve, Janet Yellen touched upon economic growth, the labor market, inflation, and, what most people tuned in for, the charted path of the Fed’s asset purchasing program. Her address packed few new insights, as she essentially plans to pick up where Bernanke left off.

One thing we did learn was that the central bank’s bond-buying strategy is not bound to a “preset” course, and that the health of the labor market will continue to influence policy decisions. With total US nonfarm payrolls still below pre-recession levels 74 months after the Great Recession officially began, Yellen may have no choice but to put the Fed’s tapering plans on hold, since this recovery has almost exclusively been the result of asset price appreciation. The more bloated the Fed’s balance sheet becomes, the stronger the case for gold.

Even with the official unemployment rate approaching the Fed’s target of 6.5% on her side, Yellen did not hesitate to describe the job recovery as “far from complete,” expressing concern over the number of workers who have been without a job for six months or longer.

As has been a central focus throughout Yellen’s career, the labor force participation ratio (LFPR), which remains near all-time lows, should play prominently into the Fed’s decision making. Like the total employment figure, this indicator paints a starkly worse picture of the job recovery than the oft-cited unemployment rate, making a late withdrawal from QE that much more probable.

Yellen’s Track Record Belies Dovish Reputation

Just as Bernanke’s understanding of the Great Depression helped mold US monetary policy over the past eight years, Yellen’s outlook on the labor market, inflation, and financial stability should color Fed policy decisions for at least the next four years.

Sure, her address signaled no immediate change in course for the Fed’s bond-buying program, but keep in mind that the newly appointed Fed Chair once argued that inflation was often necessary to “grease the wheels” of the labor market. Yellen has also pushed for the Fed to err on the side of overshooting inflation because it is ostensibly easier for central banks to subdue inflation than it is to rescue economies from deflation. Now that she is at the helm of the world’s most powerful central bank, we can only hope Yellen doesn’t put this theory to the test, though we are buying precious metals just in case.

Distorted Market Reinforces Importance of Proper Diversification

Albert Einstein once said, “in the middle of danger lies opportunity.” At this point, it is impossible to pinpoint how far along America is in a currency crisis that continues to unfold before our eyes.

Even if Yellen scales down asset purchases in a measured approach as communicated, the central bank has all but promised to keep credit cheap and abundant for the foreseeable future. As long as the Fed is manipulating market signals, investors will continue to pile blindly into asset classes for which they do not fully comprehend the risks.

Although there has never been a risk-free asset, assessing risk has arguably never been more difficult than in the current environment. This makes proper diversification an absolute necessity. Given their low correlation with other securities, precious metals offer excellent protection against broad market risk.

In spite of signals that the Fed will progressively trim its asset purchases, the reality of the situation is that the recovery is on shaky ground, which will make unwinding economic stimulus easier said than done. Let us also not forget that trillions of dollars have already been created out of thin air.

With the writing on the wall, now is truly an opportune time to add precious metals to your portfolio—if not as an inflation hedge, then at least for diversification purposes. And just as how Yellen’s dovish reputation precedes her, gold’s track record as a trusted store of value since the early days of human civilization is something investors cannot afford to overlook.


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