Why gold is surging and how US Fed can shift its trajectory

THE price of gold reached an all-time high of US$2,000 an ounce early this month. And while mainstream economists have treated the metal 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.