Gold demand is also driven by its stature as a safe harbor from both inflation and economic uncertainty. Beginning with the first stimulus package under President Bush and Treasury Secretary Paulson through to Ben Bernake’s current quantitative easing programs, U.S. monetary policy has been to flood the world with dollars, drop interest rates to zero, and do everything possible to spur spending and growth. The risk in this is future inflation, and it’s no coincidence that investors have sought out gold as protection from this possibility.
But, as it turns out, inflation has yet to manifest itself. According to the Bureau of Labor Statistics, inflation in March was only 1.5%, well below the Fed’s 2.5%-3% goal range. By some measures, such as today’s data on wholesale prices, there is real risk of a deflationary environment. Again, with current inflation at these levels and future expectations remaining low, dollars will flow out of gold and into other asset classes.
Gold Price in U.S. Dollars data by YCharts.
There is absolutely still risk and uncertainty in the markets. But, there are increasingly positive signs. The S&P is above 1,600, the employment picture continues to improve, and very smart investors are talking about an economy and market strong enough to start phasing out the QE programs. As the economy continues to improve, the price of gold will continue to decline.
The numbers point to the change. From the same World Gold Council report, investment demand is 19% above the 5 year quarterly moving average, but was down 8% from Q4 2011 to Q4 2012. Demand for gold ETFs was up 51% for the year in 2012, but was down 16% quarter over quarter. The fundamentals have changed in the economy, and the bull market is reversing.
How to capitalize
First, consider reducing or eliminating holdings in the SPDR Gold Trust (ETF) (NYSEMKT:GLD), the largest gold ETF backed by bullion. Alternatively, a long position in the S&P 500 would be an effective hedge to gold, as the changing fundamentals sending gold lower will continue to fuel the S&P higher.
Gold miners are another sector at risk. At the top of the list is Newmont Mining Corp (NYSE:NEM). the first gold company included in the S&P 500 with a market cap today of just under $16 billion. The stock is down approx. 30% year to date, driven primarily because of exposure to the price of gold on the markets.
Newmont Mining Corp (NYSE:NEM)’s Q1 earnings presentation highlighted several early indications of the changing fundamentals, including reduced adjusted net income driven by lower pricing and volumes, a 28% reduction in cash flow from operations, and cost savings through reduced capital spending on future projects and exploration.
Breaking gold down into its three fundamental demands makes the case that its bull run is over. As long as inflation remains in check, employment data continues improving, and the economy in general continues to heal, expect gold prices to continue to decline.
And remember: This change is a positive sign. It’s evidence of a recovering U.S. economy.
The article The Bull Market in Gold Is Officially Over — Here’s Why originally appeared on Fool.com and is written by Jay Jenkins.
Fool contributor Jay Jenkins has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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