Gold bugs must have been weeping into their gilded keyboards last night (we assume they have those) as the precious metal had its biggest fall in six weeks, declining nearly $40 to about $814. Poor gold bugs.
Much has been made of the metal, traditionally a hedge against inflation, in recent months — especially as the US embarks on a process of potentially inflationary quantitative easing. In fact, gold has risen from a 13-month low of about $680 an ounce in October — albeit unevenly.
But why the sudden, sharp sell-off?
Commentators so far are blaming a gain in the value of the US dollar (especially against the euro, where it reached a one-month high). This, for instance, is from Kitco’s Jon Nadler:
Deflationary pressures are relentless and are making life difficult for most assets aside from cash… Clearly, hedging for inflation is not on asset managers’ models at this juncture…
The US dollar climbed to above 83.00 on the index and refused to obey the orders to roll over and die being issued by the ever-prolific writers of its obituaries once again.
And this is from Deutsche Bank’s commodities outlook released last Friday:
We view the US dollar as the most important driver of the gold price over the medium term. We believe the strength in the US dollar during the second half of last year was driven by a surge in bond inflows and specifically US Treasuries as well as the relative outperformance of US financial equities versus their Euroland counterparts, Figure 3. Now that the risks of a full blown banking system collapse have receded, we believe “safe-haven” demand for US Treasuries will fade and remove some of the upward pressure on the US dollar.
That would mean higher gold — eventually. In the meantime, whether investors take the inflationary or deflationary view of events, particularly in the US, will be the driving force behind gold prices. DB, incidentally, is predicting “inflation shocks as more likely over the medium term.”
But, even gold bugs like Nadler are predicting more short-term pain.
Today’s technical damage might take some time to sink in, (see below) but the selling (and not just in gold) is not yet seen as abating among the larger players. Thus we need to allow for the possible breach of $800 in the near-term, unless massive buying emerges right at the current level for some reason.
Gold is ever so slightly up in Asian markets this Tuesday morning. What will be interesting to see is what happens to the precious metal as countries struggle to competitively devalue their currencies against a global recession (possibly even the euro). Currencies, we know, are all relative — not everyone can devalue at once — unless they do it against something absolute, like err , gold?
Related links:
Who’s the gold seller? – FT Alphaville