What Goes Up Must…
The past five years have been among the most tumultuous ever seen in global
financial markets, with the collapse of Lehman Brothers in September 2008 unleashing a series of events without precedent since at least the 1930s.
The financial underpinnings of the crisis, the potential consequences of the
reflationary “fix”, along with the rolling financial issues in Europe, all contributed to an extraordinary flight to quality. US Treasuries and gold were among the clearest beneficiaries, with the precious metal enjoying a Renaissance period as
its role as a financial asset was reappraised by central banks and investors.
 In July last year the yield on 10-year US debt fell to an all-time low of 1.375%
– the previous low (we have data since 1790) was 1.55% in 1945…  Similarly, the price of gold surged to post a record nominal high in mid-2011 ($1,921), less than 10% below the all-time real high seen back in early 1980.
Given its historical role as a store of value, it was not surprising that investor demand for gold increased substantially. Now, however, with the acute phase of the crisis likely to be behind us, we think the peak of the fear trade has now also passed.
The inflection point appears to have been the day in late July last year that ECB
President Draghi firmly committed the ECB to do “whatever it takes” to save the euro. Since then US 10-year yields have risen to 2.0%, and funds have begun to flow back to Europe. Interestingly, however, at least so far gold has not fallen but has rather drifted sideways.
Although is difficult to be precise, we feel that this sideways drift will turn into a
modest downward trend over the course of this year – against any sensible
benchmark gold still appears significantly overvalued relative to the long run historical experience.
 Despite the recent pullback, the price of gold has never before been this high for this long in real terms.
 Gold is also still close to the highest level ever seen relative to the average of
industrial metal prices.  And both US equities and US housing are currently almost the cheapest they have ever been relative to gold.
The forthcoming US fiscal debate may give the metal a short-term lift but, in our
view, that will be transient. With global growth now improving and inflation expectations contained, we feel that downside risks are building for gold. It looks increasingly likely that the 2011 high will prove to have been the peak
for the USD gold price in this cycle, and that the “beginning of the end” of the current golden era comes sooner than the Q3 we forecast in January.