Economist Robin Brooks spots an interesting twist in the recent rise in the gold price, which is up around 9 percent over the past month to $3,900 or so. The usual explanations for the rise of gold in this year (+46 percent) against the dollar rest on the diminishing appeal of the greenback as a safe haven. The reasons for this: longer-term concerns over U.S. debt (the big move in the gold price began in early 2024 well before Trump’s election) as well as unsettling moves by this administration from tariffs to its attempts to bully the Fed.
The catalyst for the latest leap in the gold price was clearly Fed Chairman Powell’s dovish speech at Jackson Hole on August 22. In Brook’s (understandable) view this “gave the “all-clear” for further Fed easing.” The gold price reacted accordingly. Having been “treading water for months,” it promptly resumed its ascent. It has risen around 16 percent since Powell spoke.
But on this occasion, the flight to gold has not (specifically, anyway) been a flight away from the dollar. As measured by DXY (an index of the dollar’s price against a basket of major currencies), the dollar has been relatively stable since then. Brooks compares the greenback against the G10 currencies, which shows the same thing. He argues that:
The latest rally in gold isn’t about a flight out of the Dollar. It looks more like it’s a flight out of all G10 currencies, as fears of inflation and currency debasement grow. That’s consistent with the recent rise in very long-term yields, which I’ve documented in several recent posts.
The fact that Jackson Hole has been such a powerful catalyst is very revealing and worrying. It suggests that markets are highly attuned to mounting debt levels and fiscal policy that’s out of control in many places. Of course, it’s also true that there’s many mixed signals across markets. Inflation break-evens haven’t moved recently and things like Bitcoin are flat since Jackson Hole. But there’s no condition in markets that imposes consistency across different asset classes. Better for policy makers to heed the signal from gold and put fiscal policy on a sustainable course.
If I had to choose two countries that are racing ahead of the U.S. toward a fiscal crisis it is France, where government is paralyzed, and the U.K., where government is active but destructive.
For more on the U.S. position, please take a look at Veronique de Rugy’s article up on Capital Matters today.
Her message is clear enough:
Cochrane closes by noting that the United States can handle a debt-to-GDP ratio of 100 percent if it reliably returns to small surpluses and strong growth. That is not a counsel of despair, it is a map — but maps are useful only if they are followed. Congress likes to talk about the Fed, tariffs, and the latest industrial-policy rollout. Fine. The institution that most urgently needs a policy rule is Congress itself: Borrow for genuine emergencies and productive investment, then run surpluses in good times until the debt incurred is credibly on a path toward repayment. We did it after World War II. We buttressed a disinflation in the 1980s with fiscal reforms. We can do it again. But maturity and political courage are necessary.
Meanwhile Russia continues to do its bit for the gold price:
Germany is investigating Russia’s involvement in a mysterious swarm of drones spying on a power plant, hospital and military shipyard. A fuel refinery and a regional parliament were also targeted in what could be the latest example of Moscow’s hybrid war against Nato.
The unmanned aerial vehicles were spotted flying over the facilities in Schleswig-Holstein, Germany’s northernmost province, late last week. An internal government memo, cited by Der Spiegel, the influential German news magazine, claims the critical infrastructure was being measured for size up by the drones’ operators.
This follows recent drone incursions into Poland, Romania, Denmark and Norway, and a “visit” by three MIG-31s into Estonian airspace.