Why Gold Has Been Knocked Off Its Highs


Good news is bad news if you're a gold bug. Double-dip recession fears, financial instability in the eurozone and central bank money-printing pushed gold prices to new nominal all-time highs seemingly every other day in December.

What a difference a month makes.

Gold futures have tumbled nearly 8% in January and are closing in on a full-blown technical correction of a 10% drop. Trading hands at around $1,320 on the Comex division of the New York Mercantile Exchange, the precious metal has lost $100 an ounce from its non-inflation-adjusted record high hit just last month. Indeed, gold prices haven't been this low in four months.

Friday's action notwithstanding, in which gold prices rose as the stock market sold off, safe-haven assets are suffering at the expensive of equities and other riskier assets. That's what happens when the global economy appears to be picking up steam. The allure of owning gold, which pays nothing in dividends or interest, starts to dim in a context of soaring stock prices and, gulp, rate hikes.

Gold is a hedge against inflation. The Federal Reserve remained committed to a near-zero interest rate policy on Wednesday, but global food and energy prices are rising. McDonald's (MCD), Procter & Gamble (PG) and Colgate-Palmolive (CL) all testified to that when they released fourth-quarter earnings earlier this week. And on Friday, we learned that U.S. gross domestic product grew at an annualized rate of 3.2% in the last three months. Even though this is under the 3.5% estimate that was widely forecast, which helped spark investors to sell stocks, it's a strong move up from the previous quarter's 2.6% rate.

Technically, the economy is now longer in recovery mode. It's expanding. At some point, the Fed will raise rates as part of its mandate to promote price stability. Just as important is what's happening overseas. China is the force behind the global recovery, and Beijing has moved repeatedly to tighten fiscal policy in order to cool China's torrid growth.

"Everyone focuses on what the Fed is doing, but for the gold market it is also important what the Chinese and Indian central banks are doing," write analysts at Natixis Global Associates, in a note to clients.

And then there's the debt drama in Europe, which has eased considerably. Just look at the euro, which has jumped to around $1.36 from $1.30 in the past month or so. With the Dow Jones Industrial Average ($INDU) earlier this week hitting the 12,000 level for the first time since June 2008 and the S&P 500 ($INX) at levels not seen since Sept. 2008, risk is the new black. Who needs gold?