COLUMN - Gold's fall not a harbinger of happy days: James Saft

Tue Apr 16, 2013 2:01pm IST

A saleswoman displays a gold necklace at a jewellery showroom in Kolkata August 1, 2011. REUTERS/Rupak De Chowdhuri/Files

A saleswoman displays a gold necklace at a jewellery showroom in Kolkata August 1, 2011.

Credit: Reuters/Rupak De Chowdhuri/Files

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REUTERS - Just as gold's rise never showed the policies of central banks to be a failure, so its fall cannot show they have succeeded.

Yes, the attraction to gold is driven by mistrust, its principal virtue being that, unlike currencies, it can't be created at will. No, the massive sell-off over two days in gold is not a sign that trust is back and policy-makers can soon declare victory over the crisis and make plans for restoring a more normal balance of policy.

Monday marked the second day of gold's worst two-day tumble since 1983, as it fell more than 9 percent amid huge volumes, taking its total losses since Friday to 14 percent.

Because the rise in the price of gold is associated with distrust in the global financial system and its minders, there is a temptation to reason that its very abrupt fall shows confidence that currencies won't be debased, and that growth with mild inflation will shortly be back. Unfortunately, the movement of most other financial markets on Monday was consistent with spluttering growth and a rising risk of deflation rather than a new-found and sudden belief that the fiscal and monetary medicine is working.

It isn't simply that equities are falling, but more importantly that gold's swoon has come at the same time as steep falls in a number of economically sensitive commodities. Oil is down nearly 6 percent since last week, copper fell to its lowest in a year and a half and aluminum touched 3.5-year lows. Even the prices of wheat, corn and soybeans are down.

What's more, 10-year Treasury bond yields are just over 1.7 percent and have been falling steadily for more than a month, hardly a vote for growth, inflation and a tapering off of quantitative easing.

You could make a better argument that trying to use the price of gold as an indicator of the health of anything much is bound to be futile. While greed and fear, trust and mistrust have an influence over the price of many assets, like houses and stocks, those ultimately produce some income which provides a fundamental base from which markets can infer prices. Gold, on the other hand, neither toils nor spins, but just sits there looking pretty.

That means gold is far more volatile, with emotion and short-term supply and demand driving sharp swings in prices. Don't, then, be too impressed that Monday's tumble should only happen once every two million years or so if gold trading followed a normal bell-shaped distribution (a calculation courtesy of John Kemp at Reuters). Like someone who spends too much time in bars late at night, the unlikeliest things keep happening to gold over and over again.

POOR RUN OF ECONOMIC DATA

Rather than worrying about the histrionics of gold, we should be paying close attention to the economic data. It has not been encouraging.

China, particularly, is no longer quite the engine of growth and demand it once was. Economic growth fell unexpectedly to 7.7 percent in the first quarter, a figure which perhaps looks better at first glance than on close examination.

Industrial production particularly has been crimped, growing at an 8.9 percent clip in the month but missing estimates of 10 percent growth, in part due to falling demand from Europe and elsewhere. Power generation, 90 percent of which is used by industry, rose just 2.1 percent in March, which may give a more accurate reading on the industrial sector.

Chinese imports of coal used for power generation may even fall in 2013 for the first time since 2007-2008, according to Goldman Sachs.

Neither are things humming very convincingly along in the U.S., as shown by poor industrial and jobs data recently. Inflation too seems tame globally, with little signs that central banks will soon be forced to tighten conditions.

The assumption by many, at least in the U.S., has been that growth is slowly recovering and that the summer and last part of the year will be spent in preparing for a tapering of quantitative easing.

If we reach summer and growth looks to be faltering, the Federal Reserve will be in a difficult position. Will it redouble its efforts to stimulate? Chairman Bernanke seems as convinced as ever that QE helps and that Fed activism has been justified. The longer extraordinary policy goes on, however, the harder new versions become to justify.

If in July or August we are talking again about new and looser Fed policy, gold may have yet another of its one-in-two-million-year events.

(James Saft is a Reuters columnist. The opinions expressed are his own)

(At the time of publication, Reuters columnist James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns by James Saft, click on)

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