Rickards: Falling Gold Signals Fed's 'Worst Nightmare'

Gold bugs should not worry about the metal's falling price. The Fed, on the other hand, should be very concerned, according to Jim Rickards. Despite falling gold prices, the fundamental bull case for gold hasn't changed. The dropping gold prices could signal deflation, the Fed's worst nightmare.

By Michelle Smith
Friday, 28 Jun 2013 08:08 AM
Money News

Gold bugs should not be worried about the metal's falling price, but Federal Reserve officials should be very concerned, says Jim Rickards, author of "Currency Wars" and senior managing director of Tangent Capital.

While gold prices have dropped over 20 percent since the beginning of the year and gold is down 30 percent from its peak in August 2011, "the fundamental bull case for gold has not changed at all," Rickards told Yahoo.

Rickards proclaimed that the decline in gold prices is more of problem for the Fed than it is for gold bugs.

If you hold the dollar constant, you see the price of gold is dropping, he explained, and when you reverse that, so gold is the constant factor, you see the dollar is getting a lot stronger.

"In other words, a lower dollar price for gold if gold is the constant means the dollar is getting really strong. That's deflationary. That's the Fed's worst nightmare," he told Yahoo.

Last year, the Fed made a historic move when it set an inflation target of 2 percent, but inflation is currently running below that level.

The Fed has shaken up markets with talk of possibly tapering its stimulus programs, but Reuters said some experts wonder if sub-target inflation will actually force the Fed to take a more aggressive approach.

Rickards believes it will, saying that the strong signs of deflation is one reason the Fed will likely have to back away from Fed Chairman Ben Bernanke's ruminations and either maintain or increase the level of asset purchases.

"If the Fed officials are reading market signals, if they even remember what those are, they should be very concerned about" declining gold prices, Rickards said.

He warned that gold prices are confirmation that the Fed's nightmare is materializing.

"The Fed would like real growth, but if they can't get it they will take nominal growth because debt is nominal," he noted.

"We have nominal debts and we need nominal growth and we're not getting it, or at least we're not getting enough of it," he added.

Not everyone agrees that investors shouldn't be worried about the drop in gold prices.

"You need to re-examine your expectations for the gold market if you're long — you need to stop thinking in terms of crisis and start thinking about where gold was pre-crisis," Tom Kendall, director and head of precious metals research at Credit Suisse, told CNBC.

He points back to the days before unlimited easing, and before rabid fears drove people to believe they needed to seek safety in metals. Back then, gold was trading at $1,100 or $1,150, he noted.

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