Gold’s price peak in 2011 probably signals the end of China, emerging economies and commodities leading the financial markets, according to Bank of America Merrill Lynch.
The precious metal, which rose to an all-time high of $1,921.15 an ounce in London trading on Sept. 6, 2011, has slumped 17 percent this year to $1,386.35. In 1980, a peak in gold prices preceded by several quarters the end to a bear market for bonds and a peak in inflation and oil prices, the bank’s investment strategists led by Michael Hartnett wrote in a report today.
“Arguably the gold price then acted as a lead indicator for the great disinflation of the 1980s and ’90s,” the bank wrote. “What the recent major peak in gold prices portends is still open to argument. In all scenarios it’s good for the U.S. dollar.”
Gold advanced for 12 years through 2012, as central banks joined investors in buying bullion to hedge against weaker currencies and the threat of inflation, before dropping this year on growing speculation that a recovery in the U.S. will curb demand for the metal as a protection of wealth.
Nine “sharp” declines in the price of gold since 1975 have tended to coincide with lower bond yields and a stronger U.S. dollar, as well as with U.S., Japanese and defensive equities outperforming Europe, emerging markets and resource industries, according to the report.
“After the plunge in gold ends, equities rally led by consumer and resource stocks, while the dollar lags,” the analysts wrote.
A slide in oil prices may be more indicative of the state of the world economy in the second quarter, with recent data from China and Europe “clearly disappointing,” according to Bank of America. Crude oil has fallen 5.2 percent in New York this year to $87.07 a barrel, trading close to a four-month low. Data this week showed slower-than-expected Chinese economic growth and European car sales sliding to a 20-year low.
“Excluding the U.S. and Japanese equity markets, global equity prices are now down for the year,” the analysts wrote. “The good news is that lower oil prices will ultimately prove a positive automatic stabilizer for markets, as was the case in 2011 and 2012.”
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