Gold prices are the honey badger of precious metals right now.
As 2011's very popular YouTube video showed us, the honey badger makes moves that don't make sense – it "don't care."
And neither does gold.
Like the honey badger, gold prices just don't seem to care that the world has teetered on the brink of destruction all year. They just keep heading lower.
Gold prices have been trending down for most of this year. On Jan. 2, the London spot price was $1,693.75 per ounce. As of this writing, the last bid was $1,286.88, a loss of 24%.
In the meantime, the civil war in Syria escalated, at times threatening to engulf the Middle East in flames. The U.S. government shut down for two weeks, threatening countless visits to National Parks. The world seems to have moved from crisis to crisis without pausing for breath.
And there's been inflation. The American Institute for Economic Research's (AIER) Everyday Prices Index (EPI), a measure of inflation tied to prices of consumer staples, shows a 2.5% increase since January, more than double the Consumer Price Index's 1.1%.
Crisis and inflation historically drive gold prices up. That's one of the reasons we here at Money Morning still think gold is an essential piece of any portfolio. We've had both over the last year, but the price of gold has continued to move lower, month after month, apart from a brief run this summer.
The reasons for gold's continued fall, in spite of the apparent decay of the world, just might surprise you…
Gold Is Heavy, but Macroeconomics Is Heavier
As it happens, there have been quite a few factors that have been weighing gold down, according to Money Morning Global Resources Specialist Peter Krauth.
"Gold is still in the bottoming process that started in April," said Krauth.
The price, said Krauth, "reflects a few things. First, there's the European Central Bank (ECB) rate cut, which strengthened the dollar on a relative basis. A strong dollar means less demand for gold. The second thing is the 2.8% economic growth reported for Q3, which is up from the original estimate of 2.5%."
Combine that with a stronger-than-expected jobs report and "Investors start thinking – perhaps erroneously – that the Fed will start seriously considering tapering sooner than March 2014."
Statements from the Federal Open Markets Committee (FOMC) have indicated that tapering – the process of ending quantitative easing – would only start if the economy showed signs of strengthening. Better-than-expected gross domestic product and payroll growth do, typically, indicate economic strength.
Tapering would involve increasing interest rates. Traditionally, rising interest rates leads investors to pull out of gold in search of better yield. This, naturally, sends gold prices lower.
One traditional price support for gold is also missing, says Krauth.
Around this time of year, there is usually a spike in gold prices as India prepares for the Hindu festival of Diwali. According to The Wall Street Journal, Indians have purchased half as much gold as they bought a year ago. This was largely due to government efforts to contain India's current-account deficit by imposing a 10% tariff on gold imports.
"I believe the import restrictions and taxes, causing restricted supply and higher prices, have undeniably dented Indian gold demand, providing no support for gold prices," Krauth says.
There's more to the Indian gold situation, however, than meets the eye. On Monday, Peter will reveal an incisive report explaining why one of the world's largest countries is sitting pretty, even without imports of its favorite metal.
In the meantime, just because prices for gold are low now, doesn't mean they'll stay low forever. The fundamental reasons for owning gold are still in play, and here's why they'll start to play out next year.
- The Wall Street Journal:
India's Gold Demand Fell By Half Ahead of Diwali This Year
Lower Fuel Prices Pull Everyday Prices Down