Politics 16 April 2013 People have been reading way too much into gold prices Backlash against the doom-mongers. Print HTML The plummet in gold prices has been a big story over the last day or so, and today's dead cat bounce in the market has been accompanied by an equally inevitable backlash from economists and commenters. Apparently the doom-mongers have been reading far too much into the drop in prices, and it's time for a reality check. Here, for example, is Monument Securities' Stephen Lewis (my emphasis): When a price slides as that of gold has in recent days it pays not to draw too firm a conclusion regarding the fundamental significance of the movement. When the fundamentals change as, for example, when economic growth picks up or inflation subsides, the process is usually gradual. To be sure, investors may not notice what is happening until a signal event reveals the truth, but more often than not the market response to changes in fundamental economic conditions is also gradual rather than precipitous. There has been no striking event or statement in the past few days such as might give convincing grounds for investors to abandon gold in favour of growth-correlated assets. Consequently, attempts to spin the gold price collapse as an indication that investors are piling in behind the view that prospects for global growth and for the US dollar have brightened are lacking in credibility. More likely, gold's slide reflects factors internal to that market, amplified perhaps in the conditions of heightened market liquidity, and volatility, that central bank asset purchases have created. And here's Lars Christensen with the same point in graph form: The big story in the financial markets this week is the continued decline in commodity prices – particularly the drop in gold prices is getting a lot of attention. The drop in commodity prices have led some people to speculate that this is an indication that the global economy is slowing. That may or may not be the case. However, as Scott Sumner like to remind us – we should never reason from a price change. We have to remember that the price of commodities can drop for two reasons – either demand for commodities declined (that would be an indication that the global economy is slowing) or because of a positive supply shock (that on the other hand would be good news for the global economy). The good news graph… And the bad news graph… This is not the place to speculate about whether we are in the “bad news” or the “good news”, but global markets are nonetheless telling us that this is not the time to panic – global stock prices have been trending upward, while commodity prices have been declining. The point, says the Guardian's Nils Prately, is that gold moves to its own tune, and it's tune is at a very slow rhythm: should we really be surprised that a 10-year bull market could be over? Gold has always run on long cycles, but a decade is still a very long time. › Former MPC member Posen: Forward guidance no substitute for policy Photograph: Getty Images Subscribe from £1 a week Subscribe More Related articles UK equities: A logical proposition The case against TTIP There is radical potential in revitalising adult education – why are we letting it disappear?