Gold closed modestly lower on the week after being confined to a range slightly wider than $20. Movement within that range was driven primarily by oscillations in U.S.-Sino trade deal expectations.
Chinese President Xi Jinping said that while he wants a trade deal with the U.S., Beijing is not afraid to "fight back." Those words initially saw gold buoyed within the range on Friday.
Hours later, President Trump weighed in, suggesting that a deal was “potentially very close.” That prompted a shift in risk appetite that saw the yellow metal retreat into negative territory.
"Potentially" strikes me as the operative word in that statement. It seems negotiators are either very close, or they're not. Such a statement makes me think they are not, but the stock market still seems inclined to grasp at any hint of optimism.
Earlier this week, proponents of Modern Monetary Theory (MMT) made their case before the House Budget Committee. With the U.S. fiscal deficit approaching $1 trillion for the first time since the Great Recession and the national debt climbing to record highs in excess of $23 trillion, Congress is wondering if all this debt might pose a problem.
As an aside, when I look at this above graph I take note of when the deficit started to pull away from the balanced budget line. Pretty close to when Nixon closed the gold window in 1971.
With Q2-19 GDP at $21.34 trillion, our debt/GDP ratio is north of 100%. However, testimony was largely focused on the theme that debt and deficits don't really matter as long as interest rates (servicing costs) remain low and inflation is tame.
“Federal deficits and debt are not so scary. Neither is on an unsustainable path." – Professor Randall Wray, Bard College
The path Professor Wray refers to is pretty much one-way, so at what level will the debts and deficits become "scary?" I suppose we won't know until we get there, but at that point it might be too late to reverse course.
Nonetheless, MMT seems to be gaining traction within the beltway as politicians seek a "convenient theory" to justify endless borrowing and spending. MMT will allow them to continue dodging their responsibility to enact much-needed fiscal reforms that could put the country on a path to a more stable financial footing.
Politicians are typically loathed to enact fiscal reforms because they invariably cause pain to some of their constituents. Those constituents might then not cast a vote for them. It's far easier to just borrow and spend.
As long as talk of MMT persists, I believe it will provide a tailwind for gold. It seems most rational thinkers possess at least some level of skepticism about the theory. That is certainly true among those already accumulating – or inclined to be accumulating – precious metals as a hedge against an uncertain outcome.
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