Why the black stuff can take shine off gold – by Eric Reguly (Globe and Mail – November 25, 2014)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

ROME — Long suffering investors in gold companies should be feeling the warm glow of sunshine again. Gold prices are up about $40 (U.S.) an ounce, to just under $1,200, since the end of October, when they hit a four-year low of $1,160. But gold shares are not responding. With the exception of Toronto’s Kinross Gold, one of the industry’s hardest-hit players thanks to its Russian mines, the prices of the biggies have dropped over the last month.

How can this be? The rising U.S. dollar could explain part of the share slump. But here’s another explanation: Falling oil prices.

While the connection between oil and gold prices is not immediately obvious, there is no doubt that falling oil prices are triggering disinflation everywhere; in Europe, outright deflation is a clear and present danger, which is why the European Central Bank is warming up the market to the idea of U.S-style quantitative easing.

If you buy gold is an inflation hedge, it follows that disinflation or deflation would encourage you to sell gold. And that’s what appears to be happening, thanks in good part to oil prices that have fallen by 30 per cent since June. Euro zone inflation is running at a paltry 0.3 per cent, well short of the ECB’s target rate of 2 per cent , and could go lower – we’ll get fresh inflation data on Friday.

As inflation drops, the commodities gurus at the French bank Société Générale think gold’s recent little rally could be short-lived. In a conference call on Tuesday, Michael Haigh, head of commodities research, said disinflation “is not good news for gold at all.”

Under their bearish oil price scenario of $70, SocGen expects gold prices “to move towards $1,000,” it said in a new report.

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