The Evil Fed and Gold Prices: Fear-Mongering Fail

For years, gold brokers ramped up prices to extraordinary levels with warnings that the Federal Reserve’s monetary policy would create devastating inflation and therefore a high demand for shiny metal. But that crash you just heard in the gold market? That’s the sound of a whole lot of investors calling their bluff.

GLD Chart

GLD data by YCharts

Gold's plunge has been particularly hard on mining stocks – Barrick Gold (ABX), Newmont Mining (NEM), GoldCorp (GG), Kinross Gold (KGC), Gold Fields (GFI) and Novagold (NG).

Gold Price in US Dollars Chart

Gold Price in US Dollars data by YCharts

Gold prices have been declining since October when investors began to seriously doubt the more apocalyptic tales spun by gold fanatics. Although the Federal Reserve had been buying lots of bonds for years by then – the main catalyst for impending catastrophic inflation, according to the gold story -- there were still few signs of problematic price rises. By April 10, when the Federal Reserve released meeting minutes indicating it might stop intervening in markets soon anyway, investors were primed to ditch the inflation hysterics. There’s a dramatic rendering of that change of sentiment in the chart of the ProShares 30 Year TIPS/TSY Spread (RINF), an exchange traded fund investors buy when they are concerned about rising inflation. Looks like those FOMC minutes were just the evidence they needed to get truly fed up.

RINF Chart

RINF data by YCharts

Gold investors need a return to inflation fears to rebuild gold prices. But there are several reasons the gold story is harder to sell now. The US economy appears to be growing fast enough to wean off of potentially inflation-inducing government market intervention, but not fast enough to spark inflation naturally. In fact, economies worldwide are barely growing at all, much less fast enough to fuel inflation. Even China put out numbers last week showing GDP growth at only 7.7% annually, which was lower than economists expected.

Also, investors clearly have become more skeptical of a direct connection between inflationary policies and the value of a nugget. An extension announced late last year of Federal Reserve’s quantitative easing program couldn’t prevent this year’s fall in gold price. That was before serious rumblings about an imminent end to the program. Japan’s similar bond buying program, which it ramped up considerably earlier this month, went somewhat unnoticed in the gold market, too. Those are just the sorts of government programs gold bugs say will ruin the economy with horrific inflation. Yeah, everyone has heard that story before.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.

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