Gold prices have been working their way lower despite recent events, which would normally be positive for this market. However, if looking at gold as catastrophe insurance, then its fall in value is more logical and probably has further to go.
The Cyprus bailout fiasco combined with continued quantitative easing programs from central banks with Japan promising to do it on an epic scale should have been a rallying cry to buy gold. But in fact the price of the yellow metal only made modest gains at the height of the Cyprus rescue debacle and has since started looking bearish again.
It is certainly looking like gold has lost its mojo. When a market no longer responds with higher prices to events that are normally seen as a positive, then it is generally a signal that a once bullish trend is over.
Gold chart – Catastrophe insurance is getting cheaper
The world is looking safer
Basically it is a case of perceptions with the world economy looking safer than it did some years back. Banks are now more robust and financial systems are under less stress. Also, the huge monetary stimulus from central banks has not resulted in much inflation. Therefore, investors feel less need to buy catastrophe insurance and many are thinking about return on capital rather than just return of capital. That means chasing yield and capital gains in equities for example, particularly if they believe economies are going to start growing again.