Gold Fades With Stimulus Hopes

Includes: GLD, PHYS
by: Market Blog

By David Berman

All of this good U.S. economic news must be giving gold investors a headache. Gold is often viewed as a haven investment, designed to rise in value as other assets fall. When times are bad, gold is supposed to shine.

But in recent weeks gold has also demonstrated a very close association with monetary policy – and investors are shifting their views on where that policy is headed. Earlier this year, many investors believed that the Federal Reserve would resort to another round of experimental stimulus, where it would essentially print money to buy U.S. Treasuries and hold down long-term interest rates in the process. During previous rounds of such stimulus, gold prices have risen on the belief that the value of the U.S. dollar is being eroded.

Now that employment is improving and the risks of a Europe-led financial crisis appear to be subsiding, expectations of Fed-driven stimulus are fading – and Tuesday’s monetary policy statement from the Fed, in which is acknowledged subtle improvements in the economy – bolstered this shift.

As a result, gold is in a world of pain. On Wednesday morning, it traded at $1,652 (U.S.) an ounce, falling to its lowest level since mid-January and down 13 per cent from its record high in September. Back then, it touched $1,900 an ounce.

Sure enough, gold enthusiasts will point out the longer-term track record. Gold has been on a tear throughout most of the past decade. And despite the recent retreat, it is still up 6.6 per cent in 2012. Nonetheless, gold is now lagging stocks in a big way. Consider that the S&P 500 has risen more than 11 per cent this year, and that’s not factoring in dividends. Gold is also lagging most major European indexes; Germany’s DAX, for example, is up 20 per cent. Even Japan is leaving gold in the dust, with the Nikkei 225 up 18.9 per cent this year.

Meanwhile, there might be technical factors weighing on gold, too. It recently fell below its 50-day moving average and 200-day moving average, which suggests there could be more sliding ahead.