Adding shine to stimulus

The slump in gold may hand activist central bankers more reasons to pursue the easy monetary policy that helped drive up the metal's price in the first place.

Among many explanations for the biggest drop in more than 30 years: a fourth annual global growth scare as data disappoints from China to the United States and investors fold long-held bets that monetary stimulus will ultimately unleash inflation. Other reasons for the drop range from a view that the price reached so-called technical levels to concerns that Cyprus could start a rush by indebted nations to sell their supplies of gold.

The combination of growth jitters and reduced inflation anxiety boosts the case of Federal Reserve chairman Ben Bernanke and counterparts elsewhere to keep pump-priming their economies in the hope they will finally secure traction. It also may help them beat back critics, including some US Republican lawmakers.

"Central banks can be opportunistic and proceed with quantitative easing now the gold market is surrendering with regards to its hyperinflation fears," said Edward Yardeni, president and chief investment strategist at Yardeni Research in New York. "They could also argue the weakness in commodity prices suggests a growth concern and so all the more reason to keep QE going."

Gold tumbled 27 per cent to US$1,387.40 on Tuesday from the US$1,908 it reached on August 22, 2011, and is in a bear market after a 12-year surge until last year that was fuelled partly by investors concluding that faster inflation and central-bank aid would buoy the metal as a protection of wealth. Its dive has come days before international finance ministers and central bankers meet in Washington to discuss signs of slowing in the world economy.

"Investors were somewhat optimistic that the relative strength we'd seen earlier in the year would continue," said Roberto Perli, a Washington-based managing director at International Strategy & Investment Group and a former Fed economist. "When you go through a soft patch like this, you are forced to at least think that maybe things could go in a different way than you believed."

US payrolls grew the least in nine months in March, China is suffering the weakest expansion in two decades with growth below 8 per cent, and unemployment among the 17 euro nations is a record 12 per cent. In the wake of such developments, the International Monetary Fund on Tuesday trimmed its estimate for global growth this year to 3.3 per cent from 3.5 per cent in January.