Articles
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Gold sends the markets a message
Lots have been said about the recent decline in gold prices. Most of it deals with the fundamentals of gold itself, such as mine closures, supply and demand, and the like. The rest involves the technical side, such as long-term trends and moving averages. But there are other sides to this story.
For example, gold is usually sought when inflation starts to heat up. When the economy first emerged from the Great Recession, gold rose in price, figuring that inflation would eventually rise — not just from the greater demand for metals and other commodities that usually accompanies a stronger economy, but from all the liquidity that the Federal Reserve had to create in order to push the economy forward.
It did not work out quite this way. Instead of heating up, inflation actually cooled off. When gold buyers caught on, they dumped the precious metal, sending its price spiraling down.
This was followed by indications from the central bank that interest rates would soon rise from current rock-bottom levels. Long rates moved higher, in anticipation of a tightening move by the Fed. This made fixed-income securities more tempting than gold and other commodities that paid no interest. Naturally, gold was dumped, thus putting additional pressure on its price.
Higher interest rates made the dollar an attractive investment as well. As a consequence, there was less need for nervous money to seek out gold as a safe haven.
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