The slump in gold may hand activist central bankers more reasons to pursue the easy monetary policy that helped drive up the metal’s price in the first place.
Among many explanations for the biggest drop in more than 30 years: a fourth annual global growth scare as data disappoint from China to the U.S. and investors fold long-held bets that monetary stimulus will ultimately unleash inflation. Other reasons for the drop range from a view that the price reached so-called technical levels to concerns that Cyprus could start a rush by indebted nations to sell their supplies of the metal.
The combination of growth jitters and reduced inflation anxiety boosts the case of Federal Reserve Chairman Ben S. Bernanke and counterparts elsewhere to keep pump-priming their economies in the hope they will finally secure traction. It also may help them beat back critics, including some U.S. Republican lawmakers.
“Central banks can be opportunistic and proceed with quantitative easing now the gold market is surrendering with regards to its hyperinflation fears,” said Edward Yardeni, president and chief investment strategist at Yardeni Research Inc. in New York. “They could also argue the weakness in commodity prices suggests a growth concern and so all the more reason to keep QE going.”
Gold has tumbled 27 percent to $1,387.40 yesterday from the Aug. 22, 2011, close and is now in a bear market after a 12-year surge through 2012 that was fueled partly by investors concluding faster inflation and central-bank aid would buoy the metal as a protection of wealth. Its dive has come days before international finance ministers and central bankers meet in Washington to discuss signs of slowing in the world economy.
“Investors were somewhat optimistic that the relative strength we’d seen earlier in the year would continue,” said Roberto Perli, a Washington-based managing director at International Strategy & Investment Group and a former Fed economist. “When you go through a soft patch like this, you are forced to at least think that maybe things could go in a different way than you believed.”
U.S. payrolls grew the least in nine months in March, China is suffering the weakest expansion in two decades with growth below 8 percent, and unemployment among the 17 euro nations is a record 12 percent. A Citigroup Inc. index shows data in major economies undershooting forecasts by the most since September.
In the wake of such developments, the International Monetary Fund yesterday trimmed its estimate for global growth this year to 3.3 percent from 3.5 percent in January. Such softness may help explain the selloff in gold and other commodities, said Igor Arsenin, head of emerging Asia rates strategy at Barclays Plc in Singapore. Brent crude yesterday dropped below $100 a barrel for the first time since July.
“You have a background of sluggish global growth, which weighs on commodity prices,” Arsenin said.
That gives central banks justification for their monetary easing, said Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore who worked at the Fed’s division of monetary affairs from 2004 until 2008.
William C. Dudley, president of the Federal Reserve Bank of New York, and Charles Evans, president of the Chicago Fed, said yesterday in separate remarks there’s a need to continue the central bank’s $85 billion in monthly bond purchases. The Bank of Japan this month doubled its monthly bond buying to 7.5 trillion yen ($77 billion) with the aim of achieving 2 percent inflation within two years.
European Central Bank President Mario Draghi said April 4 the bank stands ready to cut interest rates if the economy deteriorates further. At the Bank of England, Mark Carney, currently head of the Bank of Canada, will become governor in July having said central banks should pursue “escape velocity” for their economies.
“With the recent signs of weakness, I don’t see any likelihood of monetary stimulus being even ramped down any time soon,” Wright said. “For the fourth year in a row, the year begins with noises about the imminent exit strategy, which then fizzles out.”
The Fed, for example, will see cheaper commodities as reinforcing the need to keep buying assets through this year, said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington and a former Fed staffer.
“We haven’t recovered yet and we are not recovering fast,” he said. “In no sense are we having an adequate recovery.”
The Federal Open Market Committee in March reiterated its plan to buy $85 billion in bonds every month until the U.S. employment outlook improves “substantially.” The program is part of a strategy to reduce long-term interest rates and bolster growth in interest-rate sensitive parts of the economy, including housing and auto sales.
The odds also are increasing that the ECB becomes “more aggressive,” after previously resisting asset purchases as a way to help the economy, said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. Draghi said April 4 that policy makers “will assess all the incoming data in the coming weeks, and we stand ready to act.”
The likelihood that monetary policy will be kept “exceptionally loose” means Capital Economics Ltd. doubts gold’s current weakness will be sustained, said Julian Jessop, the London-based consulting company’s chief international economist.
That would reinstate a trend that began accelerating in 2008 as key central banks cut interest rates and then undertook increasingly more aggressive rounds of asset purchases to bolster their economies from recession and subsequent slow recovery.
Gold’s fall suggests investors now are questioning this view as they begin to wonder whether cheap money will trigger runaway inflation, said Neil Mackinnon, a global macro strategist at VTB Capital Plc in London.
With expansions still subpar, worldwide consumer-price inflation has dropped a percentage point during the past year and soon may slow to 2 percent from 2.5 percent in the 12 months ending in February, say JPMorgan Chase & Co. economists led by New York-based Bruce Kasman. The cost of living in the U.S. declined in March for the first time in four months, according to data released yesterday.
“Prior to this, markets were concerned that QE means inflation, but we’re having QE, not just at the Fed but at the Bank of Japan, and yet the global economy looks more uncertain than it did three to four months ago,” said Mackinnon, a former U.K. Treasury official. “Now, whether it’s wages or CPI inflation, the general picture is that inflation is still very subdued.”
There are other theories for gold’s fall to the cheapest since January 2011. Eric Chaney, chief economist at Axa SA in Paris, said the decline may be related to concern that the Fed is starting to plot an end to its third round of quantitative easing, which is now unlimited in size and length. Several officials at the March policy meeting said the central bank should begin tapering the program later this year and stop it by year end, according to the minutes released last week.
“The big fundamental change that doesn’t favor gold is that the Fed has started to signal that QE will eventually end,” Chaney said. “First it will slow, then it will end.”
Investors may be selling gold because they believe “recovery is coming and therefore gold is less useful as an asset,” Marcus Grubb, managing director of investment research at the World Gold Council, told Bloomberg Television’s “The Pulse” yesterday. “That’s what’s driving this down move.”
The two-day, 13 percent plunge -- the biggest since January 1980 -- became a “panic event” that didn’t reflect fundamentals, BlackRock Inc. fund manager Catherine Raw in London said in a separate interview yesterday on Bloomberg Television.
Some investors were trying to raise cash to cover positions acquired with borrowed money, said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago.
Goldman Sachs Group Inc. said April 10 the turn in the gold cycle was quickening and investors should sell the metal. The rout that began last week was sparked by mounting concern that Cyprus would be forced to sell gold from its reserves, “potentially reflecting a larger monetization of gold reserves across other European central banks,” the bank said in a report.
The plunge also may reflect a shift into equities as the outlook for the U.S. economy appears more clear, said Chris Rupkey, chief financial economist for Bank of Tokyo-Mitsubishi UFJ in New York.
Whatever the reason, there’s a silver lining for Bernanke: It may help him deflect political barbs in the U.S. that his stimulus policies would trigger an inflationary surge and collapse in the dollar.
In September 2011, House Speaker John Boehner of Ohio, Senate Republican leader Mitch McConnell of Kentucky and two other Republicans wrote the Fed chairman and asked that he “resist further extraordinary intervention in the economy,” saying further actions could “erode the already weakened U.S. dollar.”
More recently, Chairman Jeb Hensarling, a Texas Republican, warned Bernanke at a House Financial Services Committee session in February of “soaring inflation, or skyrocketing interest rates, all of which could make us look longingly and nostalgically upon the Jimmy Carter era of stagflation” if the Fed’s $3.2 trillion balance sheet isn’t unwound at the right time.
In fact, the U.S. dollar has strengthened against most major currencies after first-quarter growth picked up, data compiled by Bloomberg show. The yen has weakened 11 percent this year, the most among major currencies, while the British pound has declined 5.4 percent. The euro is unchanged.
“There were big fears aggressive central-bank policy would push up inflation or see currencies fall in value and it didn’t happen,” said Kit Juckes, global strategist at Societe Generale SA in London. “The fact we’re in the middle of 2013 and none of that’s happened has been enough to create an outsized correction in gold.”
The “goldbug/inflationista view of the world” in which buyers have sought to protect themselves from a surge in inflation “is, in fact, all wrong,” Nobel Prize-winning economist Paul Krugman said in an April 15 New York Times online posting.
“Maybe, just maybe, the gold crash will finally bring intellectual capitulation,” he wrote. “But I wouldn’t bet on it.”