Why Is Gold Falling?

The price of gold was smashed on Friday and again today. Gold for June delivery fell 9.3% today to close at $1,361.10 per ounce. That was gold’s biggest fall since March 27, 1980. Silver, often called “poor man’s gold,” fell 11% to $23.36 an ounce, it’s lowest price in two-and-a-half years.

So what’s behind the dramatic plunge? My view is that gold responds to real short-term interest rates. In this case, I don’t believe traders expect a Fed rate increase soon. Instead, I think they’re hinting that deflation is acting up, and that’s causing real rates to rise.

So real rates are rising in that nominal rates are stable but prices are falling. Gasoline prices, for example, have been falling recently and it’s possible they’ll soon hit a two-year low.

Tomorrow the government will release the CPI report for March. Consumer prices were unexpectedly strong in February. Prior to that, prices had been pretty flat, and there was even a downtrend late last year.

Posted by Eddy Elfenbein on April 15th, 2013 at 6:39 pm

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