HEARD ON THE STREET
Updated April 15, 2013, 3:19 p.m. ET
The Fed's Pyrrhic Victory Over Gold
By LIAM DENNING
Slick with the viscera of crushed gold bugs, the world's trading floors look even more treacherous than usual.
In one respect, gold's sudden slide—it is down almost 13% in the past two trading days to $1,360.60 an ounce—reflects an age-old story of speculative-excess unwinding. But when momentum falters as drastically as this, it also suggests a shift in the market's groupthink. In this case, it is tempting to call it the triumph of the central bankers.
More than usual, gold prices in recent years have read like a daily critique of monetary policy and the whole notion of fiat currency. Even as rising prices have crimped jewelry sales, investors have stepped in: Their share of gold demand leapt from 10% in 2007 to 29% last year.
Easy monetary policy and regular doses of euro-zone angst have underpinned gold's millenarian appeal. Subzero real interest rates both undermine the attraction of paper currency and mitigate the deterrent of gold's negative yield characteristics.
And yet, and yet…with Cyprus being the latest marginal economy to roil Europe, and Japan's central bank having unveiled a monetary howitzer in comparison to some others' bazookas, gold should be soaring. Plainly, it isn't and has been declining in fits starts since its September 2011 all-time high of about $1,900 an ounce. In addition, long-running correlations between the price of gold and negative real interest rates and the size of the Federal Reserve's balance sheet have broken down in recent months.
In short, fear of an inflationary spike or a 2008-style financial calamity appears to have ebbed. In that sense, Fed Chairman Ben Bernanke and his foreign counterparts have scored. The argument for inflation runs into continuing high unemployment in many developed economies and the risk of deflation in key markets like housing as and when interest rates rise.
Therein lies the potential hangover for those celebrating gold's drubbing. Importantly, it isn't the only commodity under pressure. Indeed, most major industrial commodities barring weather-driven U.S. natural gas and one other commodity have given back most or all of the gains they made in the run-up to last September's announcement of the Fed's latest round of quantitative easing.
Fears of a slowdown in China, reinforced by first-quarter gross-domestic-product data, are trumping inflation concerns. The other commodity still up since September is palladium, reflecting in part stronger sales of U.S. vehicles, which use the metal in their catalytic converters. But even palladium has slipped recently, down 8% so far this month.
In that context, gold seems to indicate that fear of central banks doing too much has morphed into resignation that those efforts might have staved off catastrophe but aren't enough to boost global growth, and thereby inflation, too much in the near term. As central bankers wipe the mess from the soles of their wingtips, they can celebrate a partial victory at best. Stock-market investors should take note.
In one respect, gold's sudden slide—it is down almost 13% in the past two trading days to $1,360.60 an ounce—reflects an age-old story of speculative-excess unwinding. But when momentum falters as drastically as this, it also suggests a shift in the market's groupthink. In this case, it is tempting to call it the triumph of the central bankers.
More than usual, gold prices in recent years have read like a daily critique of monetary policy and the whole notion of fiat currency. Even as rising prices have crimped jewelry sales, investors have stepped in: Their share of gold demand leapt from 10% in 2007 to 29% last year.
Easy monetary policy and regular doses of euro-zone angst have underpinned gold's millenarian appeal. Subzero real interest rates both undermine the attraction of paper currency and mitigate the deterrent of gold's negative yield characteristics.
And yet, and yet…with Cyprus being the latest marginal economy to roil Europe, and Japan's central bank having unveiled a monetary howitzer in comparison to some others' bazookas, gold should be soaring. Plainly, it isn't and has been declining in fits starts since its September 2011 all-time high of about $1,900 an ounce. In addition, long-running correlations between the price of gold and negative real interest rates and the size of the Federal Reserve's balance sheet have broken down in recent months.
In short, fear of an inflationary spike or a 2008-style financial calamity appears to have ebbed. In that sense, Fed Chairman Ben Bernanke and his foreign counterparts have scored. The argument for inflation runs into continuing high unemployment in many developed economies and the risk of deflation in key markets like housing as and when interest rates rise.
Therein lies the potential hangover for those celebrating gold's drubbing. Importantly, it isn't the only commodity under pressure. Indeed, most major industrial commodities barring weather-driven U.S. natural gas and one other commodity have given back most or all of the gains they made in the run-up to last September's announcement of the Fed's latest round of quantitative easing.
Fears of a slowdown in China, reinforced by first-quarter gross-domestic-product data, are trumping inflation concerns. The other commodity still up since September is palladium, reflecting in part stronger sales of U.S. vehicles, which use the metal in their catalytic converters. But even palladium has slipped recently, down 8% so far this month.
In that context, gold seems to indicate that fear of central banks doing too much has morphed into resignation that those efforts might have staved off catastrophe but aren't enough to boost global growth, and thereby inflation, too much in the near term. As central bankers wipe the mess from the soles of their wingtips, they can celebrate a partial victory at best. Stock-market investors should take note.
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