Deflation: The New 4-Letter For Gold Bugs

Published on Thursday, 21 June 2012 18:24 Written by Todd Shriber

Slumping global equity markets proved on Thursday that gold’s safe haven status has not been restored. Far from it in fact. Following a spate of gloomy U.S. economic and advice from Goldman Sachs to short the S&P 500, U.S. stocks plunged, but so did gold. COMEX gold for August delivery plunged $50.20 an ounce to $1,565.60. Gold’s demise meant good news for the dollar. The PowerShares DB US Dollar Index Bullish (NYSE: UUP) surged 1.1% today on volume that was well above the daily average.

The aforementioned bad economic data points include the following: The National Association of Realtors said existing home sales fell 1.5% in May to a seasonally adjusted annual rate of 4.55 million. That’s well below the rate of 6 million economists say is needed to consider the housing market healthy. Initial claims for jobless benefits fell by 2,000 to 387,000 last week, but that’s still above the 385,000 new claims economists expected. The less volatile four-week moving average jumped by 3,500 to 386,250, the highest level in seven months.

The Philadelphia Federal Reserve Bank said its business outlook survey fell to -16.6 from -5.8 in May. The June reading is the lowest level in 10 months. Economists expected a June reading of zero.

All that combined with bad news out of China and little to no growth in Europe has some traders fretting that deflation is a legitimate cause for concern. While inflation is constructive for gold, deflation, in moderate doses, is more supportive of the dollar. With the dollar index above 82, traders expect more bearish near-term action in gold.

With gold plunging today, the iShares Gold Trust (NYSE: IAU) gave up 2.6% while the SPDR Gold Shares (NYSE: GLD) lost 2.5%. Silver futures endured a 4.3% loss to $26.90 an ounce. That sent the iShares Silver Trust (NYSE: SLV) to a 4.2%. SLV is now once again testing critical support at $26.

Predictably, the other white metals were battered as well. The ETFS Physical Platinum Shares (NYSE: PPLT) gave up 1.2% and is now flirting with support at $140. The ETFS Physical Palladium Shares (NYSE: PALL) gave up 2.1% and that fund now appears destined to retest support at $57.

On the worst day in three weeks for U.S. stocks, the miners were savagely beaten. The Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) gave up roughly 8% while the Global X Silver Miners ETF (NYSE: SIL) lost nearly 7% on heavy trade. By comparison, the Market Vectors Gold Miners ETF (NYSE: GDX) looked good with a loss of 5.2%, but volume was above average in that ETF as well.