Why Gold is Going Down
Why is gold plunging? The most important
factor is that global inflation is falling, reducing gold’s value as a hedge
against rising prices. Gold bugs who were betting on an outburst of inflation
are scrambling to reverse their bets and exit their gold positions at any price.
For consumers struggling to make ends
meet, it may seem hard to believe that inflation is falling. But the evidence
is clear from JPMorgan Chase’s (JPM) global consumer price index,
which covers more than 30 countries that collectively represent more than 90
percent of world economic output.
According to the JPMorgan index, global
inflation peaked at 4 percent in 2011 and has fallen steadily since. Global
prices in February were up only about 2.5 percent from a year earlier, the
bank’s index says.
JPMorgan has two scenarios for what
happens next. Its main one is based on a “bottom-up” collection of analysts’
forecasted price trends sector by sector around the world. That shows inflation
rising very slightly from its current level for the rest of 2013. In contrast,
JPMorgan’s “top-down” analysis, which is prepared by the banks’ economists and
takes into account prices of commodity futures contracts, among other factors,
shows inflation moving down closer to 2 percent in the second half of 2013.
Joseph Lupton, a senior global economist
at JPMorgan Chase, said in an interview that the inflation decline is partly a
matter of supply bottlenecks easing, which is a good thing, and demand growth
slowing, which is not so good. Lupton said he’s not in the business of
forecasting gold prices, which tend to be whipsawed by speculation more than
other commodity prices are. Says Lupton: “Gold is an animal in and of itself.”
Last week Goldman Sachs
(GS) warned that the retreat in gold was accelerating after the longest
rally in nine decades.
“Anybody who did some buying before this
big drop is probably in some pain,” Donald Selkin, who helps manage about
$3 billion of assets as chief market strategist at National Securities Corp. in
New York, told Bloomberg News. “The perception is that gold is not really
needed as a safe haven. People are looking at the stock market, and they’re
stunned, and there’s no inflation. So people are saying, ‘What do we need gold
for?’”
Why Gold is Going Down
With gold prices down 26% from
their record close back in August 2011, the "yellow metal" has
entered a bear market of its own.
Our commodity expert explains why this is
happening... what you can expect from here... and what investors should do
now.
Though off
slightly, the U.S. dollar has maintained strength, probably thanks to
speculation the U.S. Federal Reserve may end its quantitative easing sooner
than previously expected. That hurts commodities which are all priced in U.S.
dollars.
There's
also been a considerable amount of selling of gold exchange-traded fund
holdings, which has forced those ETF managers to sell their physical bullion.
That has temporarily added supply to the market, which helps push gold's price
down.
We've also
seen an increase in speculative short positions for gold futures on the COMEX
exchange, accompanied by a decrease in speculative long positions.
So those
are the pressures on gold. Now let's look at the other side.
The fact is
that Chinese demand has been and remains very strong, along with considerable
and growing demand from a host of other central banks, mostly from the
developing world.
Despite the
carefully crafted statements from the Fed about potentially ending quantitative
easing sooner than expected, the reality is that's highly unlikely. Their
requirements of higher inflation and lower unemployment are a long way off.
Banking crises (like Cyprus), overhanging sovereign debt (think Europe, the
United States, Japan, etc.), and intensifying currency wars will also remain a
reality for some time to come.
4 Things You Should
Know About the Gold Price Drop:
· Stockmarkets have risen
· Gold's chart pattern is horrible
· Beware "bear market" talk
· Gold has risen so strongly, for so long, a big setback has
become overdue
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