The price of Gold futures for June delivery fell by 13% in April. It was the biggest two-session decline in the price of gold since 1980. The most important factor is that global inflation is falling, reducing gold’s value as a hedge against rising prices. Gold is generally seen as an inflation hedge. Investors who bet on an increase in inflation are now reversing their bets and exiting their gold positions at any price.
For consumers struggling to make ends meet, it may seem hard to believe that inflation is falling. The JP Morgan Chase’s (JPM) global consumer price index covers more than 30 countries that collectively represent more than 90% world economic output. The index shows that global inflation peaked at 4% in 2011 and has fallen steadily since and global prices in February were up only about 2.5% from a year earlier. Global commodities have been falling for the last 2 years as shown by the DJ UBS Commodity Index which is 25% off its 2009 peak level.
Investors have lost faith in Global Central Banks willingness to continue to pump cheap money into the system and support commodity asset prices. It is believed that the US Federal Reserve will no longer embark on Quantitative Easing [QE] by the end of 2013.
Gold has risen by 600% since 1999 while the S&P 500 is unchanged over the period. This prolonged rally was due to investors’ fears of a major monetary debasement from the dot com crash; Lehman’s collapse and the bank and sovereign debt crisis.
Gold does not pay any yield.
Investors are now favouring strong defensive companies that are paying dividends as evident in the year to date performance of the S&P 500 which is up almost 14%.
Despite Cyprus, Central banks’ monetary easing and the monster QE from the Bank of Japan there appears to be no major bid for Gold in the market.
However, many analysts believe that , as usual, the sell off appears overdone and that the Gold price needs to hold above $1341.