2018 Will Be Unprecedented Time For Gold Prices - Edison Investment Research
(Kitco News) - Gold’s sensitivity to official U.S. monetary policy is at the highest point since the late 1970s or 1980s, says Charles Gibson, director and sector head of mining at Edison Investment Research.
In an interview with Kitco News, Gibson said that gold prices, if the U.S. central bank is able to unwind its $4.5 trillion balance sheet successfully, could end up falling to $1,010 an ounce next year. However, if the central bank is forced to scale back the pace of its unwinding process, gold could push above $1,400 an ounce in 2018.
“The value of gold is primarily the function of economics and monetary policy – the tightness or looseness of that policy,” he said. “What impacts the price of gold is the availability of U.S. dollars.”
Gibson said that the fundamental problem the Federal Reserve is faced with is how it can reduce its balance sheet, reducing the amount of U.S. dollars in circulation, while still promoting economic growth. He noted that the only thing that saved the U.S. and global economy from a classic debt-deflation spiral during the global financial crisis was that fact that the Federal Reserve pumped liquidity into the system through quantitative easing.
Gibson said that he doesn’t expect the unwinding of the Fed’s balance sheet to be a smooth as the central bank hopes. He noted that any weakness in the US economy in 2018 could central bank to backtrack, which would be positive for gold, or face a new recession.
“They are going to contract the monetary base as though QE3 never happened,” he said. “If currency in circulation dips at all, history would suggest that there would almost certainly be a recession. We are genuinely in uncharted territory here.”
Ultimately, Gibson said the question investors have to ask themselves is if the Federal Reserve can reduce its balance sheet by one-third, taking it back to levels prior to 2012 without any hiccups.
“The answer is probably likely to be no,” he said. “If you look at historical precedence, the chances are very low that the Fed can pull this off.”