The spot price of gold fell 4 per cent on Friday and fell a further 6 per cent in early trading today, despite last week’s announcement of massive money-printing in Japan and the looming spectre of tit-for-tat currency devaluations. At the time of writing, the gold price is at $1,412. In September 2011, the price was as high as $1,920.
Although quantitative easing is often expected to lead to inflation and a boost in the price of gold as a store of value, Nossek (pictured) says that the opposite is the case and that quantitative easing has destroyed the case for holding the metal.
Performance of gold in 2013
Source: FE Analytics
"QE hasn’t done anything to boost gold; in fact it’s the absence of QE that creates uncertainty and helps gold," he said.
"When the Cyprus crisis unfolded it created uncertainty and the rally in gold returned, but it disappeared the moment international lenders issued a rescue package."
The quantitative easing programme in the US has been particularly important, Nossek explained.
"Printing created stability in the economy, supported mortgage rates, helped consumers refinance and helped banks stay above water," he said.
"QE was necessary to restore the labour market and help the underwater balance sheets in the banks."
"Stability creates confidence and with confidence the economy recovers."
"The story of gold as an asset class is based on uncertainty and that’s moved by the fact that the US is more stable," he added.
"It’s a fifth of the world economy so when it moves into a higher gear it has a massive impact on the world market."
"Secondly, the dollar has an impact on gold, but the dollar hasn’t actually depreciated year-to-date but actually strengthened."
"The strengthening of the dollar is a positive sign for gold thanks to the strength of the US compared with the rest of the world."
"US jobs numbers were disappointing, but compared with Europe they were better – Europe lost 200,000 jobs as a whole, so the number of 80,000 more jobs in the US looks much better in comparison."
Nossek says that Europe will eventually be forced in to action to try to reduce the strength of its currency, ideally through a money-printing programme of its own.
"Unleashing the printing presses is what we need in Europe. The Bank of Japan has set an explicit inflation target and I think you should expect the European Central Bank to try to downplay the euro more because that’s what Europe needs."
"Without depreciation of the currency it’s going to be pretty difficult to recover. The PMI figures in Italy and France are awful, forward-looking indicators are awful."
Gold went on a bull run in the noughties, and rose 405.24 per cent between January 2000 and January 2011.
Performance of gold over 10yrs
Source: FE Analytics
However, Nossek says that had it not been for the financial crisis the metal would have declined in 2008.
Technical indicators suggest it was due a fall as the financial crisis hit, but the increase in uncertainty in the markets saw it gain a new lease of life.
Investors in the metal are now facing that overdue pull-back.
"Trade with Asia was increasing and there was no reason for anybody to be holding gold and there was a huge market rally," Nossek said.
He adds that technical indicators – the price of gold dipping below its 200- and 50-day averages – are again supportive of a decline.
"In the short-term you are seeing the unwinding of positions which you can see in the technical indicators," he said.
Adrian Ash, head of research at Bullion Vault, says after such a strong run it was inevitable that the metal would face a tough period.
"There's a good time to own gold and a bad time," he said. "Money managers have clearly grown tired of the financial crisis, if not blasé. Gold has been on the rise for so long, and so strongly, that a big setback has become overdue."
"In US dollars, gold has gone up for 12 years straight; for UK investors, it has risen every year except one since 1998. That's a remarkable stretch, far longer than gold's successive gains in the 1970s and longer even than the US stock market's record-breaking run from 1982 to 1989."
"If this drop does prove merely a pull-back, instead of the end, it could still cut much deeper yet."
"Between January 1975 and September 1976, the price of gold in dollars fell by almost one-half. Lots of private investors sold out, taking big losses as US inflation receded."
"But that crisis wasn't yet over and inflation again soared faster than interest rates."
"The gold price rose eight-fold to its ultimate top in January 1980."
"Knowing to take profits then was still nigh-on impossible however, and as gold began a long two-decade drop, lots of private investors and professional money-managers got pulled in by the violent swings of the early '80s."
Nossek warns that although the metal may see some limited recovery this week, this is not going to change the medium- to long-term momentum downward.
"I think there will be some sort of covering and we may see some positive momentum on Monday but I do not think it will last very long."
"Market sentiment from last week will probably continue, there’s nothing very important happening."
"What’s probably going to move markets eventually is unemployment in the eurozone. It’s a no-brainer that the figures are going to go up."
"Unemployment in Holland is 7 per cent, so even in the healthier parts of the eurozone there are problems."
While Nossek is bearish on gold’s outlook in the short- and long-term, Ash is more cautious.
"Our advice to gold investors today? Beware panic-selling. See how much money you've got at risk, and remind yourself why you got into precious metals in the first place. Has the long-term picture changed?" he said
"We don't believe the financial crisis is done yet. But right now, Wall Street and the gold price say otherwise."