Gold Price Fueled by Deflation Fears
June 22nd, 2010 - 9:25 am | by GoldAlert
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Coxe, a long-time gold bull, began by addressing what he believes to be a fallacy, that a return of inflation is driving the gold price.
He pointed to the fact that the U.S. has seen its largest decline in the Consumer Price Index (CPI) in a year and half and Canada has even seen CPI reach negative levels for the first time in 44 years.
According to Coxe, “future historians may well report that the moment when gold once again became a store of value was when the dollar began soaring in response to the stench of seared Greece - and gold climbed right along with it.”
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GOLD PRICE NEWS - The gold price rose $5.05 to $1,236.43 Tuesday morning as the price of gold gained alongside the U.S. dollar.
After suffering its worst sell-off in a month, the gold price looked to rebound from yesterday’s $24.36 plunge that saw the price of gold erase over half of its monthly gain.
Year-to-date the gold price remains higher by over 12%, however, as the price of gold has continued to outperform stocks and cyclical commodities.
Gold stocks dropped alongside the gold price yesterday, as the Market Vectors Gold Miners ETF (GDX) fell $1.24, or 2.8%, to $52.52 per share.
Leading the decline were shares of
Barrick Gold (ABX),
Kinross Gold (KGC),
and Newmont Mining (NEM),
which slid 3.3%, 3.4%, and 2.9%, respectively.
Despite yesterday’s weakness in the gold price, however, several investment strategists remain bullish on the yellow metal because of the underlying fundamentals that remain in place.
A recent report by Don Coxe - Strategy Advisor for BMO Capital Markets - titled June Reflections: Summer’s Storms and Norms delves into the reason why gold is back among serious, respectable investors.
Coxe, a long-time gold bull, began by addressing what he believes to be a fallacy, that a return of inflation is driving the gold price.
He pointed to the fact that the U.S. has seen its largest decline in the Consumer Price Index (CPI) in a year and half and Canada has even seen CPI reach negative levels for the first time in 44 years.
In addition, interest rates remain near zero, which may ordinarily signal inflation but there were no significant projected increases other than wages and benefits for government employees.
Gold is becoming increasingly attractive, as there was net selling of 28.1 tonnes in bars of gold in the first quarter of last year, versus investors buying nearly 90 tonnes in the first quarter of 2010.
According to Coxe, “future historians may well report that the moment when gold once again became a store of value was when the dollar began soaring in response to the stench of seared Greece - and gold climbed right along with it.”
Traditionally the price of gold and the dollar have been negatively correlated because gold is generally bought by those skeptical of the sustainability of fiat currencies.
The recent correlation between the dollar and the price of gold can be attributed to the European crisis, causing banks and corporations to park their money in the relative safety of the greenback.
Coxe goes on to state, “We believe that Gold’s recent rise began when investors sought a classic inflation hedge, but its real run came when deflation risks were far more obvious than any evidence of inflation.”
According to Coxe, investments tied to the gold price can be a haven for investors seeking to protect themselves against risks.
Investors see the increase in financial derivatives and government deficits coupled with the huge demographic shift in Europe and desire a safer store of value, gold.
This is why the price of gold and the dollar can advance together.
Coxe cited rising national debs and the drop in real estate prices as having a tremendous salutary effect on the price of gold.
A typical Keynesian argument against gold is that it pays no interest. To this Coxe replied simply, “with interest rates in the zero range, the opportunity cost is minimal.”
However, Coxe stated that gold is still a hedge against inflation if the U.S. and European economies come back to life, since they will be pressured to increase interest rates at a time when unemployment will undoubtedly be high.
He dismissed those who bet on a return to inflation if major central banks refuse to raise rates, as U.S. growth has been muted, alongside modest recoveries in Europe.
Although the gold price is near an all time high, Coax stated, “gold should be a significant component in most high net worth wealth preservation programs, and in most endowment and pension funds.”
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