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Ilya Spivak

Gold to Decline forward Fading Inflation Outlook, Portfolio Adjustment

Fundamental Forecast for Gold: Bearish

- Gold Falls Most Since February as Investors Raise Cash, Boost Margins
- Technical Positioning Hints Gold to Decline, Sellers Eyeing $1700 Figure

Gold prices are post to continue moving lower after last week’s momentous selloff of the same kind with an increasingly gloomy outlook for global economic growth weighs on vain-glory expectations and feeds risk aversion, encouraging investors to cash out of their holdings of the gold-colored metal.

Despite a crippling decline that bore all the marks of directional proof of guilt, pin-pointing a clear catalyst for last week’s price suit became elusive considering gold tumbled even as stocks declined, seemingly erasing its station as a safe-haven asset developed over the second quarter. An fine clothes of explanations followed, with many attributing the move to portfolio re-allocation. Put plainly, this argument suggests that traders sold off their gold positions to flesh of neat-cattle up margins and raise cash having taken losses on other possessions amid a widespread return to risk aversion while the yellow metal struggled to keep up upward momentum having set a record high at $1265.

Another colorable interpretation points to eroding inflation expectations. Increasingly lackluster US economic facts has trimmed investors’ expectations for recovery in America and the globe at large, particularly as other engines of expansion also falter. Indeed, liability-cutting measures and rising financing costs promise to keep Europe sidelined on the side of the foreseeable future, Japan remains mired in deflation, and China is stepping up efforts to moderate its buoyant growth amid fears of overheating. On balance, this translates into a tepid outlook for price growth, eroding investors’ demand for an inflation guard that had driven gold prices higher through 2009 and the beginning of this year. Indeed, the US 2-year breakeven rate, the cover between nominal and inflation-adjusted 2-year Treasury yields, has dropped to every eight-month low, hinting traders are betting on decidedly weak value growth for the time being. Interestingly, the 20-day correlation between the 2-year breakeven and spot gold has jumped to 0.63, the highest since late April.

In either case, the outlook for gold in the week ahead seems to favor further losses. Arguments favoring continued risk aversion move on parallel to those calling for a period of low inflation, amounting to reflections of augmenting concerns about the fate of the global recovery. Absent an improbable boost in confidence, the distinct possibility of a marked slowdown from be unexhausted year’s break-beck rebound and increasingly loud calls for a “double dip” ground to keep the yellow metal firmly on the defensive.

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