(James Saft is a Reuters columnist. The opinions expressed are his own)
By James Saft
(Reuters) – Just as gold’s rise never showed the policies of central banks to be a failure, so its fall cannot show they have succeeded.
Yes, the attraction to gold is driven by mistrust, its principal virtue being that, unlike currencies, it can’t be created at will. No, the massive sell-off over two days in gold is not a sign that trust is back and policy-makers can soon declare victory over the crisis and make plans for restoring a more normal balance of policy.
Monday marked the second day of gold’s worst two-day tumble since 1983, as it fell more than 9 percent amid huge volumes, taking its total losses since Friday to 14 percent.
Because the rise in the price of gold is associated with distrust in the global financial system and its minders, there is a temptation to reason that its very abrupt fall shows confidence that currencies won’t be debased, and that growth with mild inflation will shortly be back. Unfortunately, the movement of most other financial markets on Monday was consistent with spluttering growth and a rising risk of deflation rather than a new-found and sudden belief that the fiscal and monetary medicine is working.
It isn’t simply that equities are falling, but more importantly that gold’s swoon has come at the same time as steep falls in a number of economically sensitive commodities. Oil is down nearly 6 percent since last week, copper fell to its lowest in a year and a half and aluminum touched 3.5-year lows. Even the prices of wheat, corn and soybeans are down.