Many of the most cherished hopes of gold bugs have come true
in the past few months but not, alas, the only one that
matters to them in the end: a sharp rise in the price to bring
it back into record-breaking territory.
The Comex front-month futures contract for gold peaked just
shy of $1,800 an ounce in early October before dropping again,
defying bulls hopes that it would rise above the 2011
peak of $1,912. In Mondays New York lunchtime trading it
was $1,730. Should its flat recent performance make
institutional investors wary of its luster in the future?
The run of favorable news for gold bugs began in August when
Mario Draghi, president of the European Central Bank (ECB),
stoked inflationary fears by outlining his outright monetary
transactions program to buy the sovereign bonds of troubled
member states where necessary. Federal Reserve chairman Ben
Bernankes September announcement of a third round of
quantitative easing (QE3) an injection of another $40
billion into the economy each month added inflationary
pressure to the U.S. economy.
The reelection of Barack Obama as U.S. president on November
6 provided further impetus for gold, by increasing the chances
that Bernanke can continue with ultra-loose monetary policy for
longer. Mitt Romney, the Republican challenger and a
monetary-policy hawk in comparison with Obama, was set to
replace Bernanke with an inflation hawk after the
chairmans term in office expired in January 2014.
These three factors boosted gold but not as much as
bulls had hoped, given past surges in the price in response to
signs that inflation might dilute the real value of the dollar
and the euro.
One argument for golds rather muted rally is that
while potentially inflationary news from the developed world
was boosting the yellow metal, the fundamentals for gold were
poor in China. Last year the Middle Kingdom was judged to have
altered the market forever by overtaking India to become the
worlds largest consumer of gold. However, demand from
China fell at its fastest year-over-year rate since 2003 in the
third quarter, hit by a retreat in inflationary fears: Chinese
consumer price inflation dropped to only 1.9 percent in
September, down from a high of 6.5 percent in 2011.
Nevertheless, it is likely that inflation fears will stalk
China again before long, since the countrys economic
slowdown is proving short-lived.