Gold may again be sending a warning to markets. Its price is again on a losing run, the most sustained since its spring cataclysm. The likely reason is that fears of a September tightening in U.S. monetary policy are reviving.
In April, a gold price decline of more than 10 percent signalled an approaching seismic shift – the end of the expectation of endless quantitative easing from the U.S. Federal Reserve. Since then, the yield on 10-year U.S Treasuries has jumped from 1.6 to 2.6 percent. Emerging markets have slipped and commodities have stagnated. The only clear winner is developed country equities; the U.S. S&P 500 index is up by about 10 percent.
The fallout now may well be a repeat but probably without the good news for developed stock markets.
The economic news from the United States is good enough to make Fed governors restless. Charles Evans, generally considered a fan of money printing, is the latest to suggest the slowdown in quantitative easing could start as early as next month. As central bankers worry less, investors worry more.
Their fear could drag gold down further, although probably not at April’s pace. But the yellow metal is a canary, indicating more substantial trouble elsewhere. Supposedly safe haven bonds again look especially vulnerable. Less Fed purchases, firmer growth and eventually higher inflation are all against them. Their yields remain too low. Their bear market has much further to go.
Commodities and emerging market assets started their bearish trends two years earlier, in April 2011. In both cases, U.S. recovery and the gradual advance of the dollar from its ultra-lows have proven negatives. If the Fed now prints less, the dollar will rise more, and commodities and emerging markets are liable to keep falling.
Crude oil has proven resilient to the downtrend; Brent is at roughly the same price now as in April. But the oil price could crack once Fed tightening comes. That would be good for commodity demand and global GDP growth – and is one good reason why the Fed should not be timid.
What about equities in developed markets? Their June wobble may be a better indicator than the insouciant July rise. Finally deprived of the fuel of cheaper funding and with market interest rates rising, it seems hard to imagine that increasingly expensive stock markets won’t be hurt.