Central banks find stimulus glitter in gold slump explanations

Gold has tumbled 27% from highs

Less Useful

Investors may be selling gold because they believe “recovery is coming and therefore gold is less useful as an asset,” Marcus Grubb, managing director of investment research at the World Gold Council, told Bloomberg Television’s “The Pulse” yesterday. “That’s what’s driving this down move.”

The two-day, 13 percent plunge -- the biggest since January 1980 -- became a “panic event” that didn’t reflect fundamentals, BlackRock Inc. fund manager Catherine Raw in London said in a separate interview yesterday on Bloomberg Television.

Some investors were trying to raise cash to cover positions acquired with borrowed money, said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago.

Goldman Sachs Group Inc. said April 10 the turn in the gold cycle was quickening and investors should sell the metal. The rout that began last week was sparked by mounting concern that Cyprus would be forced to sell gold from its reserves, “potentially reflecting a larger monetization of gold reserves across other European central banks,” the bank said in a report.

Equities Shift

The plunge also may reflect a shift into equities as the outlook for the U.S. economy appears more clear, said Chris Rupkey, chief financial economist for Bank of Tokyo-Mitsubishi UFJ in New York.

Whatever the reason, there’s a silver lining for Bernanke: It may help him deflect political barbs in the U.S. that his stimulus policies would trigger an inflationary surge and collapse in the dollar.

In September 2011, House Speaker John Boehner of Ohio, Senate Republican leader Mitch McConnell of Kentucky and two other Republicans wrote the Fed chairman and asked that he “resist further extraordinary intervention in the economy,” saying further actions could “erode the already weakened U.S. dollar.”

More recently, Chairman Jeb Hensarling, a Texas Republican, warned Bernanke at a House Financial Services Committee session in February of “soaring inflation, or skyrocketing interest rates, all of which could make us look longingly and nostalgically upon the Jimmy Carter era of stagflation” if the Fed’s $3.2 trillion balance sheet isn’t unwound at the right time.

Stronger Dollar

In fact, the U.S. dollar has strengthened against most major currencies after first-quarter growth picked up, data compiled by Bloomberg show. The yen has weakened 11 percent this year, the most among major currencies, while the British pound has declined 5.4 percent. The euro is unchanged.

“There were big fears aggressive central-bank policy would push up inflation or see currencies fall in value and it didn’t happen,” said Kit Juckes, global strategist at Societe Generale SA in London. “The fact we’re in the middle of 2013 and none of that’s happened has been enough to create an outsized correction in gold.”

The “goldbug/inflationista view of the world” in which buyers have sought to protect themselves from a surge in inflation “is, in fact, all wrong,” Nobel Prize-winning economist Paul Krugman said in an April 15 New York Times online posting.

“Maybe, just maybe, the gold crash will finally bring intellectual capitulation,” he wrote. “But I wouldn’t bet on it.”

Bloomberg News

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