The Decline of Gold: What Gives?

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Gold

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Gold has seen five months of decline, which is not the first time that gold has seen such a drop, so this is not necessarily an end to gold’s Bull Run.

After all, there are a number of specific factors that contributed to this decline. These factors include economic data, cues from the central bank’s monetary policies, emerging markets, and asset relocation. Oddly enough, these are the same factors that also contributed to gold’s run over the past ten years.

There are some economists saying that there is nothing to drive gold forward. They are saying this because these drivers have not changed at all, which means they have more or less stopped working the way they once did. However, it is the bearish factors, such as improvement in U.S. data that has a greater impact on gold prices.

The U.S. Dollar

In February, Gold futures fell around 5% for a total loss of 11% since September 2012. Gold’s appeal has been dulled by more positive housing figures. Many turned to gold when their investments were threatened. Now that one of those major investments is no longer as threatened, the interest in gold as a safe haven for money has declined.

The dollar has also shown new strength. The ICE dollar index climbed more than 3% in February. This also put pressure on gold, making it more expensive to purchase by those holding other currencies.

The good news, however, is that those bearish factors won’t necessary halt gold’s run.

Instead, the factors that are going to hurt gold’s run are the worries over the easy-money policies, the condition of the euro, and currency wars. These factors put investors on the run to look for assets that do not have depreciating values and assets that governments can meddle in.

But the run is certainly not over despite any currency wars that occur when countries try to squeeze a little strength into their currencies. The dollar’s exodus from the yen and euro has also given confidence that there is a lot of potential growth in the U.S. economy.

Future Performance

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There is also the question of whether or not gold will weaken any further. Being that gold is an investment that can protect against possible economic collapse in the U.S., this is an important detail.

Because U.S. stocks have been rallying, a lot of attention has been moving toward them and away from gold. This is just further proof that some of the wealth that would normally find refuge in gold has migrated to where the public sees higher performance. Equities are one area receiving a lot of attention.

Equities are receiving a lot of attention because they climbed in February by 1.4%. However, it seems that money managers and investors are willing to ignore the many debt issues of Europe and the U.S. Perhaps this is due to a major case of crisis fatigue and juicing of the economy by the Fed to the point that there is an illusion that things are improving.

Nonetheless, the stock market can sound very sweet, but the waters may be quite treacherous in the future. This leaves gold prices stuck, waiting on a catalyst to push the prices forward. September 2011 showed how gold can climb because the price increased to over $1,900 an ounce.

Much to Consider

As time rolls on, there are some things to be considered by gold investors. For instance, the lack of gold purchases from China caused prices to drag temporarily. However, political gridlock occurred in Italy that renewed worries over the euro and raised the safe-haven appeal of gold.

It is expected that March will see much of what February saw. This makes investors eager to see the pace of Chinese buying.

The sequester, which is the spending cuts that took effect on March 1, has also been in the spotlight. It is believed that the sequester will feed a rise in gold prices. That is the one aspect that could have March seeing a different pattern than February.

Gold and Currency Wars

As mentioned earlier, currency wars occur when countries try to squeeze a little bit more out of their currencies. For instance, Japan is known to boost their growth through huge stimulus programs. Unfortunately, these programs devalue their currencies. When this happens, the prices of gold can benefit. This has started to change the relationship between gold and the foreign exchange market, expanding gold’s role as a safe haven.

As currencies start to become devalued, gold may become an even stronger safe haven for assets. Some analysts say that we are beginning to enter a time when the price of gold will rise again, especially since the Japanese yen and Swiss franc have been lost as safe haven currencies.

So are we in a currency war now?

It is fair to say that we are because countries are actively competing against one another by trying to weaken each other. This makes imports more expensive and exports cheaper.

To actively be involved in a currency war, policy has to target the foreign exchange rate. Simply loosening monetary policy is not how it is done. However, prices dropped late in February after a report said that central banks and finance ministers from the Group of 20 nations would refrain from competitive devaluation and try to keep an eye on what is called “monetary-policy spillover.” Some took this to mean that there was a commitment to keep a currency war from occurring, while other say the war has already began. This can make gold the victor.

Victory in Gold

Even chatter of a currency war can make gold victorious. When currencies no longer act as safe havens, the only other option is precious metal. It may seem as if policy makers are avoiding the mention of a currency war because there are never any winners. However, gold will benefit no matter the degree of war between currencies.

In the end, there are countries turning currency reserves into gold. This is because the central banks know that the U.S. and Europe are going to continue to devalue their currencies. There are also some institutional buyers that are preparing for an all out currency war by buying gold. Once individual investors see what the powers that be are doing, they will once again recognize gold as a way to protect their portfolios, thus allowing it to take off.

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About Author

Ginger has over a decade of experience in the area of personal finance. She has provided informative content and advice on a number of finance-related topics to individuals in the U.S. and Europe. She is able to do this because of her personal and professional experience, which includes work in the financial sector and 10 years in tax preparation. She resides in Ohio with her husband and three children.


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