Something very amazing is happening with the gold price suddenly. The price of gold the proclaimed store of value corrected from its lofty highs around 2000 earlier this year to below 1600 USD.
The issues discussed can vary dramatically. The negative correlation between USD and gold have been cited; weak demand from India and China; speculative unwinding of gold positions. Whatever the issues may be at the moment the safe haven of gold is no longer so safe. The multi-year fear trade out of paper assets into real assets hit bumpers. One of the most credible issues evaluating gold price may be that the inflation expectations are falling and the interest rates globally follow suit. The new round of interest rate cuts by global central banks appears to have started gradually as the economic growth slows. Europe is expected to be already in recession and other economies are beginning to start the fight against the possible recession. Particularly China and India will stage a fight to revive credit cycle in order to stabilise growth which so important for the long-term prosperity and development of both countries. Falling inflation and falling interest rates could reverse the multi-year trend of negative real interest rates. The negative interest rates have always been a good guide to the direction of gold price.
It is important if the strong monotonous rise in gold price which begun in 2008 is finding some feeble support. If the final support is going to be broken it can be expected that it will spook hosts of investors who have been faithful believer in stronger and continued higher gold prices. The subsequent collapse could be more than anybody would predict.
Source: Bloomberg
