Gold Crash 2013: Why the Future Of Gold is Bleak

Gold prices plummeted for a second-consecutive session on Monday, with gold trading at $1,378 an ounce, the lowest level since March 2011, as liquidation pressure and long-only funds continued. The price is down 8% from the Friday close and 12% from Thursday.

There are a few factors that play in the plunging prices of gold, one of the most important being that global inflation is falling, which reduces gold's value as a hedge against rising prices. And although it's hard to believe that inflation is indeed falling, evidence from JPMorgan Chase's global consumer price index proves that global inflation peaked at 4% in 2011, and has steadily decreased since then.

A senior global economist at JPMorgan Chase said that the inflation decline is partially a matter of supply bottlenecks easing – which is good – and demand growth slowing – that is bad. But he also said that he wasn't in the business of predicting gold prices, because "gold," he says, "is an animal in and of itself."

Donald Selkin, a chief market strategist at national Securities Corp. echoed the same sentiments regarding the falling inflation, saying, "anybody who did some buying before this big drop is probably in some pain … the perception is that gold is not really needed as a safe haven. People are looking at the stock market, and they're stunned, and there's no inflation. So people are saying, 'what do we need gold for?'"

Forbes also provides three more reasons that gold has yet further to fall, including the fact that gold has historically performed weakest during the March to July months.  According to them, the weak seasonable demand for gold occurs mostly through the March-July period. It's in the second half of the year that the demand picks up, usually in the lead up to the Indian holiday of Diwali.

A third reason could also have something to do with reports that China's economy unexpectedly slowed, which also has sparked a wider fall in commodity prices. The world's second-largest economy had expanded by 7.7% in the first three months of the year when it was forecasted that it would expand by at least 8% or better. Gold prices had dropped 8%, and crude oil slid $2.50 in New York trading as well. The plunge in commodity prices affected the mining and energy stocks, as it is expected that the commodity prices will continue sliding.

Cyprus' announcement that it was planning to sell most of its gold reserves last week has also impacted the plummeting price of gold. According to some analysts, there is a possibility that some of the other weak Euro zone economies, such as Spain and Italy, might follow Cyprus' lead and sell some of their gold stocks as well. They fear that this will also further weaken the demand for gold.  

All the causes, however, have led to one result – a massive flight out of gold. David Govett, head of precious metals at Marex Spectron in London got it right when he said, "this is a market that has only got one thing on its mind... get me out."

How much do you trust the information in this article?

Areej Elahi-Siddiqui

A Pakistani-American undergraduate student at the Seton Hall's School of Diplomacy and International Relations. She enjoys watching inordinate amounts of television, reading far too many books and drinking lots and lots of coffee.

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