Gold faces increased pressure as inflation stays tame
Gold prices are looking even more vulnerable after April's price crash, as rampant inflation expected from successive rounds of monetary easing fails to materialise.
The idea that record-low interest rates would damage paper currencies and boost inflation was a key factor pushing gold to record highs in the wake of the financial crisis.
Ultra-loose monetary policies are still in vogue, but gold prices have slid nearly 20 per cent since the start of the year and are on track for their biggest quarterly drop in more than 15 years.
In recent months, the Bank of Japan has unveiled its largest ever stimulus programme while both the European Central Bank and the Reserve Bank of Australia have cut interest rates to record lows.
In the United States, despite hints that its quantitative easing programme may be nearing an end, the Federal Reserve is still pumping US$85 billion a month into mortgage-backed securities.
While inflation pressures have remained contained, stock markets have hit multi-year peaks in Japan and Europe, with record highs on Wall Street.
"What has occurred in Japan and elsewhere has in effect made the opportunity cost of holding gold greater than it was," Credit Suisse analyst Tom Kendall said.
He said there was no fear of inflation in the developed world for now, with the push by central banks to stimulate capital flow heading directly to equity markets.
"If investors are not concerned about having an inflation hedge, those assets that are trending nicely upwards and can deliver some yield are looking very attractive in comparison," Kendall added.
Gold is widely recognised as an inflation hedge, although not all analysts agree on its efficacy. An ounce of gold currently buys 14.8 barrels of oil, near the long-term average since 1960 of around 15.
The stimulus measures pursued by major governments since the financial crisis began to unfold in 2007 were seen at the time as classically inflationary.
"There are no signs today that sustained inflation is on the horizon," Mitsui Precious Metals analyst David Jollie said. "US inflation expectations are still around 2 per cent, inflation in the UK is coming down, inflation in Europe is almost zero. So as an investor, you don't need to buy gold."
That does not necessarily mean that inflation pressures will not emerge eventually, he said. "If you believe the floods are coming in 10 years' time, you need to build a boat, but you don't necessarily need to build it now," Jollie added.
"A year out, if we are seeing inflation starting to tick up, and we see gold at US$1,100 or US$1,200 an ounce, people will be happier to buy."
Despite this year's retreat, gold remains expensive by historic standards, after a 12-year run of gains that took prices from US$250 an ounce in 2001 to a record US$1,920.30 an ounce in 2011. Dealers say inflation would have to take off a lot to justify gold prices' fourfold increase in 10 years.