Is that really what gold is telling us?

PIMCO Chief Executive Mohamed El-Erian, who is no stranger to media comment on all things financial, has an interesting piece in the FT on his perspective on what the price of gold is telling us right now, which can be read here.

The main thrust of the piece is that gold's experience is an example of "western market-based systems that have been operating with artificial pricing".

In fleshing this idea out, El-Erian sees the key catalyst for gold's retreat as being talk of Cypriot government gold sales and fears that other European governments may do the same, along with strong equity markets and a shift in inflation expectations. This has seen that gold price readjust to a level ~$200oz lower than when the US dollar was last at this level (on a US trade-weighted basis), as shown on the chart left.

This dynamic is likened to a change in perception of a company brand.  Like Apple or Facebook, gold's "valuation has become completely divorced from the intrinsic attributes of the product - thus rendering it vulnerable to change in conventional wisdom".

This is a nice analogy, although I would add that a change in views on the continuation of QE from the Fed played a huge role in increasing short interest and initially driving ETF sales.

The change in inflation expectations does seem like a strange one to point to, as there has been no inflation for a long time and no other key markets have pointed to a material change in inflation risks one way or another either (see chart left). Indeed, falling inflation expectations in previous years has been taken as bullish for gold, as it has been associated with more QE.

From a gold perspective, the interesting question for me is that while perception on the yellow metal  has clearly shifted, what are the risks that it changes again?

For a company like Apple, it is undeniable that market share is under-attack from competitors and this cannot be rapidly addressed.  For Facebook, delivering earnings growth has also become more challenging and justifying sky-high multiples is tricky.

But for gold, the shift in market perception seems built on more tenuous grounds.

For example, while it hasn't been ruled out, it never seemed likely at all that gold sales would be used more broadly to solve Eurozone problems. Central banks remain net buyers (albeit at a slower rate).

The expiration of QE to me also doesn't seem any closer than a couple of months ago.  Certainly debt markets, where expectations on QE must be more important, have not sold off but not where near as extreme as gold.

El-Erian also sees lessons from gold for markets more generally, which he believes are disconnected from economic fundamentals thanks to financial repression from central banks and a false sense of stability.  This piece finishes by stating that if growth "fails to materialise, investors will worry about a lot more than the intrinsic value of gold". But if El-Erian is right, perhaps they should be worrying about gold's value, because if anything it is likely to be too low.