The Price of Gold Is Crashing. Here's Why

By Peter Coy

A chart of the crashing price of gold looks like a wedding ring rolling off a table. Gold futures for June delivery closed at $1,361 an ounce on the Comex in New York today, a drop of more than $200 in two sessions. Gold’s fall of 13 percent since April 11 was the biggest two-session decline since 1980.

Why is gold plunging? The most important factor is that global inflation is falling, reducing gold’s value as a hedge against rising prices. Gold bugs who were betting on an outburst of inflation are scrambling to reverse their bets and exit their gold positions at any price.

For consumers struggling to make ends meet, it may seem hard to believe that inflation is falling. But the evidence is clear from JPMorgan Chase’s (JPM) global consumer price index, which covers more than 30 countries that collectively represent more than 90 percent of world economic output.

According to the JPMorgan index, global inflation peaked at 4 percent in 2011 and has fallen steadily since. Global prices in February were up only about 2.5 percent from a year earlier, the bank’s index says.

JPMorgan has two scenarios for what happens next. Its main one is based on a “bottom-up” collection of analysts’ forecasted price trends sector by sector around the world. That shows inflation rising very slightly from its current level for the rest of 2013. In contrast, JPMorgan’s “top-down” analysis, which is prepared by the banks’ economists and takes into account prices of commodity futures contracts, among other factors, shows inflation moving down closer to 2 percent in the second half of 2013.

The headline on JPMorgan’s report: “The slide in global inflation may not be over.”

Joseph Lupton, a senior global economist at JPMorgan Chase, said in an interview that the inflation decline is partly a matter of supply bottlenecks easing, which is a good thing, and demand growth slowing, which is not so good. Lupton said he’s not in the business of forecasting gold prices, which tend to be whipsawed by speculation more than other commodity prices are. Says Lupton: “Gold is an animal in and of itself.”

Last week Goldman Sachs (GS) warned that the retreat in gold was accelerating after the longest rally in nine decades.

“Anybody who did some buying before this big drop is probably in some pain,” Donald Selkin, who helps manage about $3 billion of assets as chief market strategist at National Securities Corp. in New York, told Bloomberg News. “The perception is that gold is not really needed as a safe haven. People are looking at the stock market, and they’re stunned, and there’s no inflation. So people are saying, ‘What do we need gold for?’”

source: http://www.businessweek.com/articles/2013-04-15/the-price-of-gold-is-crashing-dot-heres-why#r=rss

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