The fall in gold prices is a warning about the global economy, but the markets are unsure about what needs to be done
The price of gold is crashing and this is warning sign for the health of the global economy. Some major investors say the fall in gold shows a failure on the part of the FED and other central banks to revive demand in spite of large amounts of monetary injections into the system. Some say the fall in gold might be the beginning of a major shock in the markets, recalling the 1998 collapse of the Long-Term Capital Management hedge fund and the global financial crisis that came exactly ten years after that. Ahead of both crises, sharp falls had been observed in gold prices. According to Mohamed El-Erian, the co-chief investment officer of PIMCO, which oversees $2 trillion in assets, the gold and commodities weakness is “signaling concerns about global growth.” El-Erian recently said: “Commodities have been sending the signal on growth for a while, and now even louder.”
Global economy far from revival
The recent rush into the safety of US Treasuries – which has pushed yields close to four-month lows – is another sign that the global economy is far from a revival. Treasuries are often seen as a shelter when the economy is weak or unstable. There is even talk of the possibility the US could head back into recession, though this is a minority view. Some FED officials recently have been expressing concerns about the slow down in inflation. According to end of April data from the US, consumer prices in March eased by 0.2 percent, although no change was anticipated for that month. The core price index – which excludes energy and food prices — rose by 0.1 percent, below expectations. In addition, a correction was perhaps due for gold. Its price had risen for 12 straight years, and had gained 52 percent in the past three years. “Even at these levels, gold is still not attractive. The odds favor the bull market being over,” says Jim McDonald, chief investment strategist at Chicago-based Northern Trust Global Investments, which in early March told clients to stop allocating a position to gold.
