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The Dark Heart of Gold

The US Federal Reserve has rightly eased monetary policy aggressively since the onset of the coronavirus recession in March. But gold bugs would take the recent record-high price for the metal as a sign that the Fed should tighten monetary conditions sharply.

CAMBRIDGE – The price of gold reached an all-time high of $2,000 per ounce in early August. And while mainstream economists have treated gold as a sideshow since the world abandoned the gold standard in 1971, this recent price spike is a significant signal.

Three explanations for the elevated gold price – related to US monetary policy, risk, and investors’ growing desire for a safe-haven alternative to the dollar – have been offered. Each contains some truth.

The US Federal Reserve has eased monetary policy aggressively since the onset of the coronavirus recession in March. True, there currently is little sign of inflation – for centuries a major motive for holding gold. But rising goods prices are not the only sign of easy money. Today’s low real interest rates, depreciated dollar, and high stock prices – not to mention the size of the Fed’s balance sheet – all reflect the Fed’s accommodative monetary-policy stance.

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