The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The Fed’s hand is hovering over the wide open tap. The U.S. central bank may cautiously begin to ease its $85 billion monthly dose of quantitative easing. The gold bubble has burst in anticipation. The line of other losers could be long. With less liquidity from the Fed, bonds, commodities and stocks are likely to be hit – probably in that order.

The dollar is the agent of change. Money printing devalued the greenback and beefed up many markets, above all gold. Now the index of the dollar against major trading partners is close to its highest since July 2010. The yen, the euro and the previously rampant Australian dollar are weakening as U.S. bond yields offer new buyers a fraction more.

The yield on 10-year U.S. Treasuries is just short of 2 percent and close to its highest for two months. The Fed’s monthly purchases of Treasury bonds has kept it down but the chances that the Fed will trim its ambitions are growing. The timing and scale of the tightening remain uncertain but the strengthening recovery suggests that bond yields could rise further. Bond investors might avoid a crash, but a long bear market may already be beginning.

Commodities also look vulnerable, even though prices have trailed behind equities. The Thomson Reuters CRB index is down 2 percent in the year to date while the U.S. S&P 500 stock index is up by 18 percent. Commodities’ divergence from stocks reflects in part a rising dollar, in which commodities are priced. Supply may be improving too, notably in North American oil production. And yet with Brent crude at $104 per barrel, oil remains highly priced by most historical norms. There may be further commodity downside as the QE tap tightens.

For equities that’s mostly good news, promising cheaper raw materials and fuel for growth. Corporate earnings are also lubricated by modest wage growth and still-low interest rates.

Hopes for renewed growth have made equities the world’s favourite bet this year, though investors have also been attracted by the relatively low equity valuations. However, if the Fed tap tightens and bond yields and medium-term interest rates rise it is unlikely that even equities will get off scot free. At least some of their recent strength should be seen as QE froth. When the tap has been gushing for so long, even a slight change may have the capacity to shock.

By Ian Campbell

LONDON (Reuters Breakingviews) – For gold investors, the bad news literally outweighs the good. The gold price looks headed down and may repeat April’s big falls. The pace of decline depends on U.S. data and the Federal Reserve.

The good news weighs in at 60 tonnes, the increase in demand for gold for jewellery in the first quarter. That is a 12 percent increase over the previous year, according to the latest figures from the World Gold Council, although total jewellery demand of 551 tonnes was still lower than two years before. On the other side of the scale is a far heavier weight: the 195 tonnes decline in investor demand – a colossal 49 percent fall.

There is another broad split within investment flows. Physical demand for gold bars and coins was 10 percent higher. American Eagle coins, for example, sold well in the United States. Cautious folk may be stocking up in case central-bank money printing goes terribly wrong. But investors in exchange-traded funds were stampeding away – a cool $9.3 billion net sale – afraid of an imminent end to the Fed money printing that turned safe-haven gold into a golden speculative bubble.

“Feel it in your hands” gold-bugs are unhappy about lily-livered ETF investors, although they didn’t complain when the ETF crowd stampeded into the metal. Yet while gold-bar investors may move more slowly than ETF ones, they ultimately may be thinking the same way. Investment in physical gold trebled between 2007 and 2011. These inflows too are likely to reverse.

More big price drops could come soon. For chart-watchers the next key number is $1,322, the level to which a precious ounce of gold plunged in April, before bouncing. If that low point is broken, the subsequent downside may be steep. Jewellery demand won’t offset the sheer weight of investment selling until gold gets much cheaper – say $1,000.

The best near-term hope of price support is the gold-bugs’ arch enemy, Ben Bernanke, the Fed chairman. A worsening U.S. soft patch and dovish, money-printing words from him could nourish gold-friendly fears of another money-printing binge. But unless the U.S. recovery derails completely, the future remains the same. The investors who stampeded in will carry on stampeding out.

CONTEXT NEWS

- Gold fell in European trading on the morning of May 17 for a seventh straight session, its longest losing streak since March 2009, to $1,381 an ounce. Gold lost nearly 6 percent of its value in the six sessions to May 16.

- The World Gold Council’s report on first-quarter demand showed total global jewellery demand up by 12 percent year-on-year, driven in the main by Asian markets. Jewellery demand in China was up by 19 percent on the same period last year and stood at a record 185 tonnes. However, overall total global demand for gold in the first quarter was 963 tonnes, down by 19 percent from the fourth quarter of 2012 and by 13 percent on a year earlier as overall investment demand fell year-on-year by 49 percent.

- Graphic: Commodities performance in 2013

link.reuters.com/reb25t

- World Gold Council release link.reuters.com/pyr28t

(Editing by Edward Hadas and Sarah Bailey)

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Nigel Lawson is back in the ring and as sharp as ever. The UK chancellor who dismissed his critics as “teenage scribblers” in the 1980s – as he fomented a housing bubble that weighed on the economy for half a decade – is now throwing his weight behind a UK exit from the EU. It will make Britain stronger, he jabs. Someone should throw in his towel.

Lawson is looking east, towards Asia and emerging markets, and entirely overlooking an EU that is, he says, “past its sell-by date”. But why give up on your European neighbour, largest trade partner and the biggest global market? Lawson’s choice, between the EU and Asia, is worse than false. Leaving the EU would harm, not help, the UK in Asia and emerging economies.

At present, multinationals know that an investment in the UK is one in a leading EU economy that also, conveniently, has the international language of business as its mother tongue. If the UK exits the EU, its value as a European hub is lost. Headquarters and key staff might overlook it in favour of a continental European base.

UK businesses don’t want the risk of weakened ties with Europe. Yes, as Lawson rightly claims, EU red tape is a hassle and an annual UK contribution of 8 billion pounds could and should be slimmed down. Lawson mentions too the “foolish and damaging” financial transaction tax. But the UK can opt out of it, and is doing so.

The awkward truth is that the UK’s relationship with the EU, while argumentative and difficult, ultimately serves Britain well. Britain takes the benefits of EU membership without the risk of the euro currency experiment. It is successfully isolating itself from euro zone bailouts and Europe’s less wise steps.

It’s better for a nation to try to get on with its neighbours, even troubled or troubling ones, than to ignore them entirely. That is especially true when they continue to buy almost half your exports. The UK should stay in the European ring. It’ll be less of a global heavyweight if it steps out.

Gold is a canary in the mine for financial markets. Its burst bubble warns of the huge dangers lurking for bonds, commodities and stocks. Those dangers may be at a safe distance now, but they are real.

The correction in gold is an extreme case. The metal had everything in its favour for a decade. Goldbugs wisely distrusted the U.S. housing bubble. When it popped, quantitative easing debased the dollar and ultra-low interest rates reduced the opportunity cost of holding gold. A U.S. recovery, however weak, and a rising dollar were the writing on the wall. The smart money has already been heading out. The tipping point had to come, and has.

In markets other than gold and silver the danger of large corrections is there – but the tipping point isn’t here yet. Fears about U.S. and global growth, and the risk of earnings shocks, are the issues for stocks and commodities. China’s GDP growth slowed to 7.7 percent in the first quarter. The most recent U.S. retail sales and jobs data have disappointed.

These growth fears are not bad enough to cause panic talk of enhanced bond buying by the U.S. Federal Reserve, expectations that would support riskier assets. They merely sustain the hope that easing won’t taper off quickly. Yet U.S. stocks are at all-time highs and the Vix options volatility index trades close to its lowest since 2007. That complacency need be rattled only a little for stocks to beat a retreat.

Rising U.S. Treasuries betray an expectation of no change on quantitative easing soon. The yield on the 10-year note is down from over 2 percent in March to 1.72 percent. Japan’s easing may also be supportive of Treasuries. With money-printing and low growth still on their side, safe-haven bonds remain safe.

The big problem for markets will come when growth fears recede and extreme U.S. monetary policy begins to end. Falls in stocks and commodities could be substantial, but also possibly mitigated to some extent by stronger economic fundamentals. Bonds are still more vulnerable. Like gold, they are a safe haven past their time.

Gold’s lesson for investors is one most know already. Markets are being dangerously distorted by easy money. Corrections will come – and be severe when they do.

LONDON (Reuters Breakingviews) – Gold is a canary in the mine for financial markets. Its burst bubble warns of the huge dangers lurking for bonds, commodities and stocks. Those dangers may be at a safe distance now, but they are real.

The correction in gold is an extreme case. The metal had everything in its favour for a decade. Goldbugs wisely distrusted the U.S. housing bubble. When it popped, quantitative easing debased the dollar and ultra-low interest rates reduced the opportunity cost of holding gold. A U.S. recovery, however weak, and a rising dollar were the writing on the wall. The smart money has already been heading out. The tipping point had to come, and has.

In markets other than gold and silver the danger of large corrections is there – but the tipping point isn’t here yet. Fears about U.S. and global growth, and the risk of earnings shocks, are the issues for stocks and commodities. China’s GDP growth slowed to 7.7 percent in the first quarter. The most recent U.S. retail sales and jobs data have disappointed.

These growth fears are not bad enough to cause panic talk of enhanced bond buying by the U.S. Federal Reserve, expectations that would support riskier assets. They merely sustain the hope that easing won’t taper off quickly. Yet U.S. stocks are at all-time highs and the Vix options volatility index trades close to its lowest since 2007. That complacency need be rattled only a little for stocks to beat a retreat.

Rising U.S. Treasuries betray an expectation of no change on quantitative easing soon. The yield on the 10-year note is down from over 2 percent in March to 1.72 percent. Japan’s easing may also be supportive of Treasuries. With money-printing and low growth still on their side, safe-haven bonds remain safe.

The big problem for markets will come when growth fears recede and extreme U.S. monetary policy begins to end. Falls in stocks and commodities could be substantial, but also possibly mitigated to some extent by stronger economic fundamentals. Bonds are still more vulnerable. Like gold, they are a safe haven past their time.

Gold’s lesson for investors is one most know already. Markets are being dangerously distorted by easy money. Corrections will come – and be severe when they do.

CONTEXT NEWS

- The price of gold slumped on April 15, racking up its heaviest two-day loss in 30 years. Investors also dumped stocks and other commodities after weaker-than-expected Chinese data raised concerns about the global economic outlook. (Read full story here)

- Spot gold dropped as much as 8 percent, falling as low as $1,355.80 an ounce. In the last two sessions gold has fallen over 12 percent, making for its worst two days since late February 1983.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.) (Editing by Chris Hughes and Martin Langfield)

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Gold is teetering on the edge of big falls. The Cyprus crisis and Korean tensions have helped the safe-haven metal surprisingly little. That is probably because gold faces its nemesis in the U.S. Federal Reserve’s growing unease about quantitative easing.

The Cyprus crisis should have been good for bullion. By threatening even insured bank deposits, the initial stages of the Cypriot debacle ought to have demonstrated gold’s “safety first” merits. But small Cyprus has not fanned fears about the euro zone sufficiently.

Instead, Cyprus has been slightly bearish for the metal. The island’s central bank may have to sell gold reserves to help raise around 400 million euros. Other euro periphery nations have far more gold. Italy is the world’s fourth largest holder, with 2,452 tonnes of gold, worth around 95 billion euros. Still, it seems unlikely for now that euro zone central banks will follow stricken Cyprus’s lead. On the contrary, global central banks are likely to remain gold’s chief support. Russia will probably remain a significant buyer this year.

It is in the global private investment community that bullion is losing favour and on a big scale. SPDR Gold Shares, an exchange traded fund, has seen net redemptions of about $7.7 billion in the year to date, according to IndexUniverse.

Analysts who were previously positive have turned negative. Goldman Sachs this week lowered its gold forecast for the second time in less than two months, from an average of $1,610 an ounce for 2013 to a still-optimistic looking $1,545 an ounce, and falling to $1,270 an ounce by the end of 2014. Spot gold was trading around $1,560 at 1100 GMT on Thursday.

The friend that risks turning into an enemy is the Fed. Its ultra-low interest rates and money printing favoured gold by debasing the dollar. Some Fed governors are now fretting about QE and want the programme to be tapered before the end of this year. It would take just a word from the Fed to send the yellow metal sprawling.

If events were to get out of control in the Korean peninsula, gold would get a stay of execution. But assuming tensions ease, hundred-dollar falls in the bullion price look likely and could occur this year.

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The UK economy is flat-lining and austerity is blamed. But George Osborne should resist mounting pressure to reverse course or slash taxes in his third budget as Chancellor of the Exchequer on Wednesday.

Few British governments since the Thatcher era have come in for as much criticism as the current administration. Osborne inherited an economy with a deficit of 11 percent of GDP. Recession was inevitable as big housing and lending bubbles deflated. The chancellor set out on the tough path of adjustment but is getting little thanks for it.

He got one thing badly wrong. By charitably ring-fencing the biggest-spending departments, health and education, he forced all the austerity on the rest of the government. That has made progress on spending cuts and deficit reduction slower, limiting room for manoeuvre. Yet Osborne has too little political capital to change course towards still more rigorous austerity. The National Health Service has become an untouchable totem.

Eventually, a smaller state will make lower taxes affordable. But it’s hard to justify broad tax cuts now with the deficit still exceeding 7 percent of GDP. Upping borrowing for the sake of consumption might alarm markets.

Some small stimulus would help. The Confederation of British Industry has wisely called for the construction of 50,000 homes, by putting 1.25 billion pounds into the affordable homes scheme. It is construction that has been holding back economic growth. Had the sector merely been flat in 2012, rather than suffering an 8 percent fall, the UK economy would have grown by 0.6 percent, and not remained flat.

Osborne could also sensibly release funds for road and other transport improvements. Big projects are too expensive and would make no difference to growth this year. Small-scale improvements and repairs can be quick to create jobs and growth. And the government could cut taxes for the least well off. The tax-free income ceiling is due to increase to 9,440 pounds in the new tax year. It would cost Osborne around 3.2 billion pounds to get up to the 10,000 pound figure.

How can this be funded? Limiting civil service pay rises to 1 percent for two years will save an annual 1 billion pounds in 2014-15. Osborne could extend the policy, make further cuts in departmental spending and retain a tough stance on welfare. Further erosion of tax breaks on personal pensions could bring in about 0.6 billion pounds. Eliminating the 25 percent tax free lump sum element of final pensions could generate 2.5 billion pounds per year.

This is still just fiddling with a few billion pounds in an economy of 1.5 trillion. But Osborne can do little else. He must be prepared to be public enemy number one until the results of his policies come through.

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The only question had been which rating agency would shoot first. Moody’s did the deed, removing the UK’s triple-A rating on Friday. It is a political humiliation for the UK government, but the downgrade also removes that lingering expectation of being gunned down. The irony is that the humbling may help the UK achieve recovery sooner – and without firing another monetary policy shot in the currency wars.

The downgrade sets events in course. Fiscal policy is unlikely to change much. George Osborne, the chancellor, will remain constrained by the poor prospects for the deficit. And bond yields will not jump. Similar downgrades of the U.S. and France made little difference. When debtors are weak and yields absurdly low, a ratings cut deters few investors.

The pound, though, is a different story. Sterling was already down when the rating agency kicked. It fell sharply on the news of the downgrade and is at risk of falling further to $1.50. The euro could climb to 90 pence, taking the pound close to its 2009 ultra-lows. That’s bad – for exporters to the UK.

For British producers, a weak currency is good news. The latest CBI industrial survey reports UK manufacturers finding much stronger demand in home markets and, to a lesser extent, export ones. A yet-weaker pound will help. A sector that has been a big drag on growth may be reinvigorated.

Less helpfully, the weaker pound will show up quickly in prices. Inflation, now 2.7 percent, is very likely to head well over 3 percent. Yet this too may alleviate an uncertainty. Bank of England Governor Mervyn King and two others sabotaged sterling this month by voting for yet more quantitative easing. But higher inflation will stiffen resistance to QE in the nine-man monetary policy committee. Mark Carney, the incoming BoE governor, will find it harder to lead them into QE carnage in July, should he be so inclined.

Lack of growth and rising debt spurred Moody’s downgrade. The downgrade may itself do something to help growth. But Moody’s looks wise to have judged the downcast UK’s outlook as stable, not negative.

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

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 five-fold 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 going forward.

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.

The often close correlation between equity and commodity prices has faded. World equities are up 15 percent since August while commodities have barely moved. Is this a paradigm shift? Probably not, though shale gas is rattling energy markets. Equities may simply have run too fast on the back of quantitative easing while commodity investors have hesitated over global growth worries.

As long as QE keeps fuelling global liquidity, investors in both asset classes can remain relatively sanguine. The big new factor is Japan’s entry into the money-printing race. For risk assets such as equities and commodities, the QE competition between the United States and Japan is a boon. The U.S. Federal Reserve is printing $85 billion in new money per month. According to Masaaki Shirakawa, the governor of the Bank of Japan, the BOJ’s “unlimited easing” will consist of around 50 trillion yen ($550 billion) in funds in 2013 and a still-higher 13 trillion yen ($143 billion) per month from January 2014.

Commodities may be lagging in part thanks to the dollar. In previous “risk on” episodes the greenback tended to weaken, pushing up commodities, which are mostly priced in dollars. But in 2012 the dollar appreciated slightly, and Japan’s fresh monetary stimulus is directly targeted at weakening the yen. The dollar has softened against the euro, but the currency has been stable since September against the trade-weighted basket of international currencies.

Aside from the influence of the dollar, commodity investors may be fretting about fundamentals in a way that equity investors are not. Global growth was lacklustre in 2012, creating fear of weak physical demand for commodities. In addition, there has been one definite supply-side shift: cheap U.S. shale gas, which may be unsettling oil and other energy prices. Equity prices, however, may be less influenced by growth figures than valuations. With yields on safe-haven bonds at record lows, valuations look attractive. The MSCI world equity index trades on a forward multiple of 13, compared to a 20-year average of 16.

The worst economic fears, meanwhile, have not materialised. Chinese growth and commodity demand haven’t collapsed: iron ore imports, for instance, rose 8.4 percent in 2012. And with the euro zone crisis in abeyance, the prospects for global growth in 2013 are improving.

The correlation between equities and commodities may therefore tighten again, especially if share prices pull back a tad. But both asset classes remain attractive – while the QE tide continues to flow.