Gold can go higher even if the Fed doesn't start yield curve control program - Merk
(Kitco News) - U.S. monetary policy and government stimulus measures will continue to support gold prices above $1,800 an ounce even if the Federal Reserve doesn ’t use any type of yield curve control measures.
Expectations are growing for the U.S. central bank to launch a program that will cap low-end interest rate yields as early as September; however, Axel Merk, president and chief investment officer at Merk Investments, said that this type of program would send the wrong signal to financial markets.
“Yield curve control, I think is a rather stupid concept, if I could use that eloquent word, because then you draw a red line and when you draw a red line, you're inviting the markets for a fight,” he said.
Merk added that the for a lot less money, the Federal Reserve would have just as much impact maintaining their current program and talking bond yields down.
“There should be other ways of achieving [low bond yields], not just, just buying lists, but they're so spooked that the markets will have a tantrum that they're not doing it,” he said.
He added that this environment of uncontrolled monetary policy and stimulus measures will continue to push gold prices higher as central banks continue to “play with fire.”
Along with gold, equity markets are seeing higher valuations in a world awash with central bank liquidity; however, Merk said that he doesn ’t expect the two assets to compete with each other.
Although central bank monetary policy continues to compress market risks, Merk said that it appears that investors are also paying more attention to the importance of diversification. Gold is a good diversifier because it has no long-term correlation with equities.
“With regard for gold, it's always the fear trade in some ways. People always are glad they've had gold in the past, but then they don't know why they should hold it in going forward,” he said “We are seeing an increase interest and of course, once gold starts moving, you have other investors jump on board and only increasing the volatility.”
As for the one correlation Merk continues to watch in the gold market is the one with real bond yields. As inflation moves up and interest rate stay low, real interest rates will push lower, improving gold ’s holding costs, he said.