HEARD ON THE STREET
February 20, 2013, 1:09 p.m. ET
A Fearful Time for Gold
By LIAM DENNING
Do you feel lucky, punk? The problem for gold bulls is that too many punks are nodding their heads these days.
Gold's latest quantitative easing-fueled rally has now rolled over completely. Trading at less than $1,590 an ounce Wednesday morning in New York, gold futures are back to where they were in early August, just before QE-fever kicked in. Gold has lost 12% since its latest peak in early October.
Such ennui is surprising. QE is continuing, talk of currency war abounds, and Congress's latest self-inflicted crisis, the sequester, looms. This combination of loose money and economic tension is the stuff of gold rallies. That it isn't working should alarm gold bugs.
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Bloomberg News
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Recent history shows that gold prices have tracked two things pretty closely: the expansion of the Federal Reserve's balance sheet and the decline in real interest rates. Between September 2008 and July 2011, when the Fed's holdings tripled to almost $2.9 trillion, gold roughly doubled to about $1,600. A few months later, as the Fed was on the cusp of announcing Operation Twist, gold hit its all-time peak of just over $1,900. Soon after, the real 10-year rate slipped below zero.
But real rates, even though they remain negative, appear to have bottomed out in December. And while the Fed's assets breached $3 trillion in January, the pace of growth—5% year-on-year—is far below the 20%-plus rates that prevailed in 2011.
And fear isn't what it was. The sequestration, even if it happens, is regarded less as a one-way ticket to recession and more as a diversion onto a slower path. Macroeconomic Advisers reckons it would cut economic growth in 2013 from 2.6% to 2%.
It would also likely stay the Fed's hand in ending QE, which should support gold. But just delaying QE's end doesn't provide enough oomph for gold at this point. Instead, this combination of moderate optimism and Fed support is boosting cyclical assets like stocks—which yield dividends—and copper, both of which are up about 8% over the past six months, compared to gold's 4% drop.
True fans of gold will look at all this and see a world lulling itself into a false sense of security—and a buying opportunity ahead of the next deluge. But they also have much to fear from a lack of fear itself.
The price of gold, which touched $1,750 an ounce in December, is now around $1,600 - and falling. Polya Lesova joins Markets Hub. Photo: AP.
Such ennui is surprising. QE is continuing, talk of currency war abounds, and Congress's latest self-inflicted crisis, the sequester, looms. This combination of loose money and economic tension is the stuff of gold rallies. That it isn't working should alarm gold bugs.
.
.
.
Recent history shows that gold prices have tracked two things pretty closely: the expansion of the Federal Reserve's balance sheet and the decline in real interest rates. Between September 2008 and July 2011, when the Fed's holdings tripled to almost $2.9 trillion, gold roughly doubled to about $1,600. A few months later, as the Fed was on the cusp of announcing Operation Twist, gold hit its all-time peak of just over $1,900. Soon after, the real 10-year rate slipped below zero.
But real rates, even though they remain negative, appear to have bottomed out in December. And while the Fed's assets breached $3 trillion in January, the pace of growth—5% year-on-year—is far below the 20%-plus rates that prevailed in 2011.
And fear isn't what it was. The sequestration, even if it happens, is regarded less as a one-way ticket to recession and more as a diversion onto a slower path. Macroeconomic Advisers reckons it would cut economic growth in 2013 from 2.6% to 2%.
It would also likely stay the Fed's hand in ending QE, which should support gold. But just delaying QE's end doesn't provide enough oomph for gold at this point. Instead, this combination of moderate optimism and Fed support is boosting cyclical assets like stocks—which yield dividends—and copper, both of which are up about 8% over the past six months, compared to gold's 4% drop.
True fans of gold will look at all this and see a world lulling itself into a false sense of security—and a buying opportunity ahead of the next deluge. But they also have much to fear from a lack of fear itself.
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