By Adil Yousuf
The price of Gold dropped by more than 10% last week, raising concerns about the yellow metal's credibility as a safe haven. Let's consider the main reasons behind Gold's descent.
The most important factor contributing towards declining Gold prices is declining global inflation - Gold buyers who had previously bet on a spike in inflation are now scrambling to sell. According to JP Morgan Chase's global consumer price index, worldwide inflation peaked at 4% in 2011. Inflation has fallen steadily since 2011; as of February 2013, global prices rose only 2.5% versus February 2012. A recent report by JP Morgan on global inflation cited by Businessweek said that it would likely continue to slide; thereby more weakness in Gold is expected.
Secondly, the nightmare unfolding in Cyprus isn't helping Gold either. The recent news from Euro zone bailout talks suggested that help for Cyprus via Europe's structural fund will probably be limited. This has led to further speculation that Cyprus might soon face increasing pressure to put its Gold bullion reserves to work. Hence, the price of Gold continued it's decline amid fears that sales of the precious metal forced on Cyprus by its desperate financial plight would lead to wholesale dumping by other hard-pressed countries in the coming months as well (Economics 101: increase in supply = decline in price). However, it should be noted that other indebted Euro zone nations like Portugal and Ireland have been granted an additional seven years to pay back their loans as a reward for sticking to their austerity programmes.
Gold price has been high in recent years mainly due to Fed's "quantitative easing". Hence, the recent hints that the Fed has given pertaining to the end of bond purchases and monetary stimulus further added as a catalyst in Gold's price decline.
Additionally, an overall bullish stock market in 2013, has led to flow of capital into equities and away from Gold (Again, Economics 101: decrease in demand = decline in price).
Finally, Gold prices have been partially supported by China's Growth Economy for years. According to Chinese government figures, the nation's economy expanded 7.7% vs. an expected 8% in the first quarter of 2013. Disappointing Chinese economic growth is also weighing on Gold prices.
Seems to be classic Demand and Supply theory in play. The bigger question, is it a shift in economic curves, or simply a movement along the demand / supply line?
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