4 reasons gold got caught in a ‘perfect storm’

Gold is suffering a major meltdown. Prices for the yellow metal have dropped to their lowest level in more than five years, and the downdraft didn’t relent Monday, with futures recording an eighth straight session of losses.

Over the past week, “a number of events and trends have come together to create what looks like a perfect storm for gold,” said Colin Cieszynski, chief market strategist at CMC Markets.

He listed 4 significant influences:
1). Reduced demand for defensive haven

The “risk of an imminent Grexit has passed for now,” and political tensions around the world also appear to be easing with the completion of the Iran deal and the U.S. “reopening diplomatic relations with Cuba,” said Cieszynski.

2). Reduced need for inflation hedges

With Iran preparing to return to the oil market amid a continuing supply war among other producers, the price of oil has tumbled back toward $50 a barrel. That means “headline inflation looks likely to remain subdued for some time,” Cieszynski said.
3). U.S. interest-rate liftoff and U.S. dollar rally

The risk of financial crises in Europe and concerns that China could spiral out of control and disrupt the world economy have eased dramatically, “keeping the Fed on course toward interest-rate liftoff.”

4). China and gold purchases.

China on Friday released data on its gold holdings for the first time since 2009. Gold reserves rose by about 60% from 2009 to 1,658 metric tons, which would have been great for gold, “except that gold only represents about 1.5% of China’s forex reserves and this percentage has not grown in the last six years, crushing hopes China would save the gold market,” said Cieszynski. Read: China finally says how much gold it has, but nobody believes it

Looking ahead

The plunge in gold prices may not be over yet, but it may be soon.

Gold may not be at its absolute low, but “it’s not far from it,” said Brien Lundin, editor of Gold Newsletter. The price decline “isn’t something that we would expect to extend much further, or last for an extended period of time.”