Gold hurt as downside momentum accelerates

In the Lead: “Momentous Momentum Moment”

The Danish bank also believes that “Going forward, focus in China will increasingly be on longer-term structural reforms and on making the economy more consumer — rather than export — and investment-driven; this should, all else being equal, also dampen the country’s appetite for commodities.” This should come as no surprise to anyone; the Chinese leadership itself has recently given signals that is must shift the focus from exports to domestic consumption. Without this change, the country’s economy might be fatally flawed and subject to future difficulties. This is well documented, folks.

Then, there is that “pesky” little matter of…the Fed and QE. If you have come to erroneously believe that central banks (be it the Fed, or any other C.B.) is prepared to extend “easy money” for the foreseeable future and beyond, to infinity, and/or is unable to hike interest rates because it is “stuck” in some ultimate “tight spot,” from which it will never, ever extricate itself, well, think again:

Danske Bank warns that “The helping hand from central banks won’t be around to lift commodity prices forever, either. At the December Federal Open Market Committee meeting a majority of the members expressed that they would be in favor of phasing out the aggressive QE program later in 2013, if the economy starts to pick up accordingly. So, there is no Fed [easing more or resting at zero] forever.”  

The above is precisely what Citi Chief Economist Daniel Ahn had on his mind when he stated that his team is “marking-to-market” its gold price projections in the wake of gold’s near 8% decline that has occurred since last October. According to the Business Insider, Mr. Ahn’s team’s forecast for lower gold prices is “largely dependent on one factor that is overwhelmingly driving gold prices right now: The strength (or weakness) of the U.S. dollar.”

To the extent that you believe in some kind of unfolding global “currency war” (and we do not) you must consider the fact that — as A. Gary Shilling of A. Gary Shilling & Co. frames it — “in effect, competitive devaluations will only add to the [U.S.] currency’s luster as the only haven in an uncertain world.” Consider the alternatives to the greenback, says Mr. Shilling:

The rigidly controlled Chinese economy and financial markets eliminate the yuan as a rival to the dollar for the foreseeable future. Export-dependent and inward-looking Japan doesn’t want the yen to be a primary global currency. And the European crisis eliminated the euro for at least a number of years. The U.K. is a relatively small economy, which curbs the pound’s appeal, and the solid Swiss franc is now tightly controlled. The credibility of the dollar has been strained by its overall decline since 1985, but still is substantial. The troubling U.S. current-account deficit will probably shrink as retrenching consumers moderate imports and U.S. production becomes increasingly competitive and the nation moves toward self-sufficiency in energy.” What’s it going to be, folks? The 3-cent Russian ruble? The 2-cent Indian rupee? Perhaps the 12,285:1 Iranian rial? 

In addition, it also appears that the formerly strong correlation between real interest rates and gold has broken down over the course of the past year. The conclusion reads as follows: Given the high and resilient negative relationship between the U.S. dollar and nominal gold returns, the model assigns a very high 70% weight on dollar drivers, and only a 20% weighting on ETF flows and a 5% weight on real interest rates and inflation respectively, resulting in a forecast for a -4.2% annualized weakening of nominal gold prices to year-end.” Citi is not alone with this kind of price forecast revision, however. Recently, Goldman Sachs issues its own — a bit more dramatic — call for long-term reversion toward the mean (or, at least closer to it) in the yellow metal.

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