INSIDE INVESTOR: How markets are reacting to central bank moves

It has been described as the biggest collapse in the gold market in nearly 40 years.

In April, the price of the precious metal plummeted suddenly by almost $300 an ounce, officially ending a bull run for gold that began almost a decade ago.

Gold is a peculiar market. But its movements often can be traced back to central bank policies and intervention. And last month’s collapse is a classic case of the sort of impact central banks can have on global markets.

Gold prices had been rising solidly for most of the decade leading up to 2011 when they peaked at more than $US1900 an ounce, with predictions it soon would burst through $US2000.

Long considered a safe haven and in particular a hedge against inflation, gold prices had surged higher as central banks throughout the developed world adopted low interest rate regimes to boost economic activity.

In the chaos that surrounded the early days of the global financial crisis, gold found even more support as central banks cut real interest rates to below zero. Many analysts predicted this “cure” would create greater problems in the future, and lead to long term inflation.

Two years into the radical loose monetary policy experiment, and the developed world economies still were struggling to recover let alone show any sign of inflation. That’s why gold prices got the wobbles in 2011.

Exactly what sparked last month’s rout is difficult to determine. Some reckon it was Cyprus’s decision to sell gold bullion to help pay for its European Union bailout. Others point the finger at the Bank of Japan.

Japan has a new government, or rather has returned an old one under the leadership of Shinzo Abe. It also has a new central bank governor Haruhiko Kuroda who, on April 4, announced an enormous money printing program specifically designed to lift Japan’s inflation rate and lower the value of the yen.

While inflation ordinarily would boost gold’s value, a side-effect of Japan’s intervention is that it will limit the US dollar from falling further. That will constrain inflation in the world’s biggest economy.

But given most commodities such as metals and grains are priced in US dollars, the Japanese effectively have put a lid on commodity prices.

The ramifications of the Japanese central bank intervention have yet to be fully understood. But the immediate effect of constraining US inflation was the spark that ignited the fuse on a mass exodus from gold.

And it is a perfect example of why, as an investor, you need to be aware of just what the world’s central bankers are up to.