A gold brick is still a brick, and hurts just as much when it falls on your foot.
It’s a metaphor employed by currency manager Axel Merk (left) on Tuesday to explain the recent drop in the price of the precious metal.
He then lists the reasons why it’s happening:
- China’s GDP growth has slowed to 7.7%, ushering in an era of more modest growth. In the past, disappointing growth numbers out of China have, on occasion, been a negative for the price of gold, as well as broader “risk sentiment.”
- The reason the ECB isn’t printing more money is because other central banks have shown that it doesn’t work. For the time being, the market appears to agree: the printing presses have not achieved a great deal, as exemplified by lackluster growth in the developed world.
- The Eurozone, therefore, has not fallen apart, and rampant inflation has not taken hold. As such, it’s only reasonable for gold “to take a breather.”
- Surely the Fed would like to go back to a more normal environment, but recent disappointing data show that such talk might be premature. Still, forward-looking markets might start to price in that “at some point” there may be an exit from the highly accommodative monetary policy.
- In the past, we have cynically indicated that there’s never been a Eurozone crisis; instead, there’s a global crisis. It is naïve to think that Japan’s problems are all solved with the onetime salvo of the Bank of Japan.
- The last time we checked, Paul Volcker was not the most likely candidate to succeed Bernanke, but super-dovish Janet Yellen was the frontrunner. Taken together, there are plenty of reasons to believe that we haven’t seen anything yet with regard to the price of gold, and with that we mean on the upside.
- We also have to keep in mind that a lot of technical damage has taken place: many investors that bought gold in the past two years have paper losses and might be eager to sell on rallies. From our point of view, volatility is your friend, as it shakes out weak holders of gold, making price appreciation ultimately more sustainable.
“The recent volatility in gold does raise a broader concern,” Merk concludes. “It appears there are fewer and fewer actors in the markets, with trading ever more driven by computer models and hedge funds. When the going gets tough, few bids are in the markets. That’s a challenge going far beyond the yellow metal, extending to stocks and other markets.”