Wednesday, March 11, 2015

Gold's Long Decline Is the Real Story

Equity markets started off this year by falling. They rallied in February, working their way back into the green. The Standard & Poor's 500 Index now is up about 1 percent for the year.

Gold has traveled the opposite path: The yellow metal began at about $1,175 an ounce. By Jan. 23, it had rallied to almost $1,300. In February, gold slipped about $60 and the fall continued this month. Gold now is down about 1.6 percent year-to-date and it wouldn't be a surprise if the precious metal fell more this month.  “March has a history of being the worst” month for gold, according to Bloomberg. During the past four decades, on average, bullion futures decline 1 percent in March. “Prices fell 65 percent of the time, more than any other month.”
gold chart
The reasons gold prices can't seem to gain any traction are many: Job creation has been robust, inflation is low and the Federal Reserve is widely expected to begin the process of easing back on monetary accommodation -- strengthening the dollar and further reducing gold's appeal.  

As we noted late last year, the gold narrative has failed. The promised hyperinflation that was supposed to send gold soaring never arrived. Instead, we had disinflation, with a threat of global deflation. 

QuickTake Rise and Fall of Gold

Other stories were posited by traders who were long on hope but short on cogent analysis. The ballot proposal requiring the Swiss National Bank to hold at least 20 percent of its 520 billion franc ($523 billion) balance sheet in gold was rejected by Swiss voters. Another tale: India was going to cut its import duty on gold, leading to soaring demand. But India decided to maintain the duty. The latest bout of wishful thinking was that a gold version of the new Apple watch would consume “up to 756 metric tonnes of gold per year . . . this equates to roughly a third of gold's total annual global mine supply," according to a company called Goldcore. As my Bloomberg View colleague Mark Gilbert explained yesterday, that fantasy was laughable on its face.

The most damaging slice of reality for the gold-bug narrative has been the strength of U.S. dollar. Yes, I know, we were promised the collapse of fiat currency generally and the U.S. dollar specifically. Quantitative easing and zero interest rates were going to be the end of paper money, and mark at long last a return to the gold standard -- the one true currency.

Alas, that was not meant to be. The greenback is now at 12-year highs versus the euro; at less than 1.08, it is nearing parity, which was last seen in 2002. The dollar also is at multiyear highs versus the Japanese yen. Against a basket of major currencies, the greenback is up more than 8 percent so far in 2015, after rising more than 12 percent in 2014.

Although stocks have gained little this year, there may be more potential and for some of the same reasons that gold has underperformed: Job creation has been robust and inflation is low.

Why more potential? More hiring and rising wages are likely to help revive sluggish retail sales. Durable goods have been especially soft, and they historically tend to gain as hiring increases. Capital investment by corporate America has also been soft. But analysts have been talking about a long overdue increase in business investment, which would goose economic activity.

Perhaps the most significant difference between stocks and gold is where they are in their long-term cycles. Gold, after a rally that lasted a decade, has been declining since August 2011. Stocks have been gaining for the past six years after a huge crash in 2008-09.

If the economic trends of the past few years persist, they favor stocks over gold. 
To contact the author on this story:

Barry Ritholtz at

To contact the editor on this story:

James Greiff at

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