Gold Downside Risks Editor: The near-term outlook for gold remains negative, but gold is a long-term investment, and as Alasdair Macleod, a Senior Fellow at the GoldMoney Foundation, pointed out recently: When the bullish factors for government bonds and other financial assets are replaced by the prospect of rising interest rates and falling prices, there will be a rush for the exit across a wide range of markets. And here the reaction of the monetarists at the central banks will be crucial. It is a virtual certainty that collapsing bond and other asset prices will set off a new crisis by undermining the collateral backing the entire banking system. Central banks will see no alternative to keeping interest rates as low as possible, accelerating the expansion of the money-quantity to prevent a new systemic crisis. This is true for all major currencies, not just the US dollar. Cash will therefore be an unattractive alternative to owning financial assets, which leaves vital commodities and monetary hedges, such as precious metals, as the only refuge for monetary capital.”

The path of least resistance for gold prices remains down.

Our global gold advance/decline line has broken below key support and is at a 2-year low. This indicator has a good track record of timing major shifts in gold, and the decline is particularly worrisome since it reflects universal negative sentiment towards the yellow metal. ETF outflows last month were also the largest on record, and the option-based momentum suggests further outflows.

Any upside surprises in economic data could also stifle demand for gold. Tame inflation expectations, rising real rates and a flattening yield curve diminish gold’s safe haven appeal. Consistent with this, our gold cyclical indicator is low and falling.

We cannot completely rule out another U.S. (or worldwide) deflation scare, which would return gold to investor radar screens and lead to new highs. But we assign this outcome a low probability.

The bottom line

Tail risks are receding and the corollary from new highs in the Dow index is a declining equity risk premium, which is negative for gold.

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