GOLD PRICE NEWS - The gold price plummeted $46.45 to $1,197.19 as a deflation scare swept through Wall Street. The price of gold suffered its steep drop as liquidation in COMEX gold futures sparked a wave of selling in all investments tied to the gold price. The 3.7% fall in the gold price was its second largest decline this year, exceeded only by the $44.50, or 4.0% drop in the spot price of gold on February 4. With today’s slide in the gold price, the yellow metal cut its year-to-date gain to $101.86, or 9.3%.
The sell-off in the gold price came as the euro currency surged 2.4% to 1.2523 against the U.S. dollar - its highest level since May 23. Despite its historical inverse correlation to the euro/ dollar currency cross, the gold price has recently displayed a negative correlation to the euro. Amid a slew of disappointing news on the state of the U.S. economy, the U.S. dollar fell as demand for dollar-denominated assets fell. Weekly jobless claims were reported this morning and the figure exceeded expectations, coming in at 472,000 versus the 455,000 projected by economists. Also coming in worse than expectations was the June ISM index, which was came in at 56.2 - below the 59.0 estimate - as new orders and construction spending disappointed. Finally, pending home sales in May plunged 30%, the largest month-over-month drop ever.
Weakness in the gold price spread to the entire commodity complex, as the silver price fell 4.3% to $17.81 per ounce - its largest decline since May 4. The prices of oil and copper were also under pressure with the cyclical commodities posting declines of 3.8% and 1.9%, respectively. The broader market fared better than the gold price and the commodity complex as the Dow Jones Industrial Average (DJIA) rebounded from an intra-day loss of as much as 152.13 points to finish lower by 41.49, or 0.4%. The DJIA did manage to close, however, at 9,732.53 - its lowest level since October 30, 2009.
A flurry of questions surrounded the falling gold price, notably if a top of significance has been made. Today’s severe decline in the gold price is definitely a blow to the bulls, however, from a fundamental perspective, what has changed today versus yesterday? The global economic recovery is fragile and today’s soft U.S. data rightfully has investors worried about the specter of deflation. With debt levels as elevated as they are, a strong deflationary pulse could very well send the economy into recession again. What is different this time is that central bankers have made it clear that they will engage in quantitative easing programs in order to prevent the economy from going into a tailspin. Quantitative easing is a fancy word for printing money and represents a strong tailwind for the gold price.
The Federal Reserve is not alone in pressing the case for continued hyper-liquidity. When the festering debt crisis in Greece threatened to take down the euro early last month, European Central Bank (ECB) ministers responded with a $1 trillion rescue plan aimed more at calming creditor jitters over system-wide bank exposure to not only Greek sovereign debt, but that of Spain, Portugal, and Italy as well.
Bank of England (BOE) Governor Mervyn King reassured an audience recently that the BOE would hold rates steady despite signs of spiking inflation. In Asia, despite a staggering public debt-to-GDP ratio of 218%, the Bank of Japan has made an additional 3 trillion yen ($33 billion) available to banks to lend to Japanese companies in an effort to support demand. Fear of deflation among central bankers has all but blinded them to the hazards of an aggressive monetary inflation campaign - specifically, the currency debasement their easy-money policies are stoking.
The price of gold has suffered severe setbacks over the course of its ten consecutive years of appreciation. How deep this current correction in the gold price ultimately goes is up for debate. However, fundamentally, the case for higher gold prices is firmly intact and the more intense the current deflation scare becomes, the higher the gold price should ultimately go.
