Reuters Breakingviews delivers agenda-setting financial insight. Its global correspondents react to stories as they develop, delivering sharp and provocative commentary on big financial news as it breaks.
Gold is teetering on the brink of a precipitously high cliff. That some U.S. Federal Reserve officials are reluctant to press on with the bank's quantitative easing was enough to knock it to a seven-month low. What an actual end to QE would mean is not something gold investors want to hang around to find out. Though it may be near to a ledge now, the metal's medium-term downside looks deep.
Gold's fivefold rise since 2000 reflects bets of different kinds. It has been a safe haven against currency-devaluing central banks and the inflation they might create, and an alternative to a euro that might fall apart. And this safe haven, unlike the boring zero-interest Swiss franc, was also an exciting speculative play in which big gains have been made.
But since last year investors have begun to feel less need for a golden safe haven. The euro zone has held together for now, China has avoided a hard landing and the U.S. economy appears to be on a recovery path. As the United States recovers, the possibility that the QE tap will be tightened becomes greater. That's supportive for the dollar and undermining for gold.
Nor can gold enthusiasts find much support in other sources of demand. In 2012, the volume of demand for gold for use in industry and jewellery fell. Only one class of buyers, central banks, bought more. Russia is diversifying its reserves into gold and may keep doing so. But overall central-bank buying was unusually high in 2011 and is less likely to cushion gold's fall in future.
Some shrewd investors have already run. Regulatory filings have revealed that billionaire George Soros' fund-management firm halved its holdings in a gold exchange-traded fund in the third quarter of 2012.
Gold will find ledges. But to turn it into a climber again it needs a serious new bout of euro zone crisis or, best of all, a U.S. and global slowdown that sends the Fed groping for ever more QE. In the absence of that disaster it's gold that no longer looks safe.