GOLD PRICE NEWS - The gold price plummeted $21.12 to $1,234.62 as the precious metals sector underwent a sharp sell-off Monday afternoon. After rising to a new record high of $1,265 per ounce this past evening, the spot price of gold gave back its entire gain, accelerating to the downside and dropping back under the psychologically-important $1,250 per ounce level. The fall in the gold price occurred in tandem with a stronger U.S. dollar, which recovered its early losses against the euro. The euro had climbed to a four-week high of 1.2469 against the dollar this morning, but reversed lower and was down by 0.2% at 1.2347 in afternoon trading.
Gold stocks tumbled alongside the gold price, with the Market Vectors Gold Miners ETF (GDX) sliding $1.51, or 2.8%, to $52.55 per share. Notable decliners in the sector included Agnico-Eagle Mines (AEM), Goldcorp (GG), and Gold Fields (GFI). In afternoon trading, shares of AEM, GG, and GFI were lower by 3.1%, 2.9%, and 2.6%, respectively.
China’s announcement that the nation will gradually remove its currency peg to the U.S. dollar initially fueled a rally in stocks, commodities, and the gold price. As investors had a chance to digest the news, however, it appears that the impact of China’s decision may not be as substantial as first thought. U.S. equities gave up a considerable portion of their gains as trading progressed, as the Dow Jones Industrial Average (DJIA) initially rallied as much as 143.52 points before succumbing to the selling pressure that engulfed most assets.
One individual who downplayed the effects of China’s move from the outset was David Rosenberg - Chief Economist and Strategist at Gluskin Sheff, who previously served as the Chief Economist at Merrill Lynch. Rosenberg, who was one of the only economists to predict the onset of the financial crisis in advance, headlined his latest “Breakfast with Dave” daily commentary, “China’s Currency Shift Not A Game-Changer.”
Rosenberg presented several pieces of evidence to explain why the inflationary effects of China’s decision pales in comparison to the deflationary impact of the “global deleveraging cycle.” While he acknowledged that the currency revaluation will ease global trade imbalances at the margin, Rosenberg noted that the yuan has reduced its undervaluation because China’s current account surplus relative to GDP has already dropped from 11% at its 2007 peak to 6.1% last year. Moreover, although China has a very large surplus with the U.S., China is running a deficit with the remaining G20 nations. These factors suggest that the impact of China’s latest decision is considerably less than many believe -and its impact on stocks, commodities, and the gold price is likely to be muted.
The last time China made such a significant currency announcement was in July 2005, when it first moved away from its U.S. dollar peg. Rosenberg noted that while the decision was billed at the time as a huge “reflationary” event, the ultimate inflationary consequences proved minimal. The core inflation rate was 2.1% in 2005 and currently stands at 0.9%. In contrast, the deflationary shocks of the financial crisis have proven to have a substantially greater effect in recent years. “It goes without saying that not even Chinese initiatives in the FX market, no matter how much they can dominate the headlines as is the case today, ultimately proved to be no panacea against a collapse in the U.S. credit and housing markets, deflationary pressures, a huge global recession and a European sovereign default crisis,” wrote Rosenberg.
The risks of deflation therefore remain significantly greater than those of inflation, according to Rosenberg. As for the implications for gold, such an environment provides a constructive backdrop for the gold price, as central bankers around the world continue to fight deflation tooth and nail with easy monetary policies and quantitative easing programs. Such aggressive deflation-fighting policies cheapen the value of money and are likely to support higher gold prices as investors continue to re-allocate funds away from traditional asset classes and into investments tied to the gold price.
