Gold Discountign Another Financial Crisis?

The current weakness in gold is telling to Simon Derrick, head of currency research at Mellon Bank. He sees a parallel between the recent record high of $1,260 and the topping of $1,030 back in February of '08.

He believes it is telling that with the exception of June 21st, the day that China changed its currency policy, falls in the price of gold have come after the publication of uninspiring US economic data.

"The current decline in the price is down to deterioration in sentiment about the economic outlook (and the threat of rising deflationary pressures) rather than a reflection of greater optimism about the standing of the euro," Derrick wrote.

Demand for gold from India fell by 30 percent last year and could fall by as much as 40 percent next year if the Bombay Bullion Association is to be believed, Derrick said.

"All this comes at a time when the technical picture for gold is sending some very clear warning signals. Most notably, a series of lower highs on our favored momentum indicator since the fourth quarter of last year speaks of a longer term trend that is looking increasingly tired," he added.

With the oil price flashing a similar warning, it seems we are getting closer to answering the question whether this feels more like the summer of 2008 or that of 2007. On the basis of the current evidence it seems like July of 2008 provides a better fit," Derrick wrote.

It's an interesting argument, perhaps because it implies there'll be a huge buying opportunity in the fall or winter. The trouble with it is, gold's decline from its February high was (in retrospect suspiciously) out of season. The recent high and current decline are in season.

Besides, the only visible fault line is underneath European sovereign debt. Unlike in the '08 credit crisis, gold benefitted from the Eurocrisis. The only way that a next round could hurt gold would be if the banks' capital levels implode in a deflationary spiral.