It's easy to find worriers who predict an economic meltdown is coming. It's a lot harder finding evidence of the actual meltdown.
The price of gold is possibly the best proxy for the outlook on global stability, and lately the price of gold has been plunging. At about $1,400 per ounce, gold is down more than 15 percent so far this year, and down about 27 percent from the all-time high of $1,921 it reached in September of 2011. A lot of factors affect the price of gold, but in general, the value of gold rises when investors worry about the global economy and falls during better times when stocks and other assets seems like better investments.
The economy is still fragile, with chronically high unemployment in the United States, debt problems pervasive in Europe, and growth in China slowing more than expected. But there's nothing new about these problems and in general, investors seem to be gaining confidence that the worst possible outcomes won't happen. "Wherever there is a crisis, it is being patched up," currency expert Axel Merk of Merk Investments wrote in a recent newsletter. "That doesn't make the rest of the world 'safe,' but it may be perceived to be less risky than before the patch was applied."
There's no secret about who's applying the patch: the Federal Reserve and its chairman Ben Bernanke, followed by the European Central Bank and now, the Bank of Japan. The Fed's aggressive easy-money policies, known as quantitative easing, date to 2008 and could continue into 2014 or 2015. The ECB has been pursuing similar policies since 2012 and the Bank of Japan recently announced its own Fed-style easy-money program.
Gold bugs who had been pushing up prices typically buy the precious metal because they anticipate higher inflation, plunging stock markets, or other problems that degrade the value of currencies and other risky assets. But those fears have not materialized. Inflation is low throughout the developed world. Central-bank easing has helped the U.S. economy get back on its feet and policymakers in Europe have managed to forestall one financial crisis after another. In Japan, central-back actions may finally reverse two decades of deflation and stagnation.
A robust global recovery might still make gold a good investment, because it would make high inflation more likely and force central banks to jack up interest rates. That seems to have been part of the equation for investors buying gold during the last couple of years, especially with a few analysts predicting gold could soar to as high as $5,000 an ounce.
But the economy is growing just slowly enough to keep demand for labor weak, which keeps wage increases low and inflation tame. We may still get rising inflation and higher interest rates at some point. But for now, inflation doomsayers have missed the mark by years and gold buyers are paying a price for excessive pessimism.
"If quantitative easing is able to lift animal spirits and alter long-term expectations for risky investment, then gold will get destroyed," says David Zervos, global head of strategy and economics at investing firm Jefferies & Co. "Gold will only be the right trade in a stagflationary or highly inflationary environment."
In a way, a worst-case scenario for gold is developing. Prices have been falling when there are signs of strength in the economy, which have pushed stock prices to record highs recently and raised the return on assets considered much riskier than gold. But signs of economic weakness—such as recent slowdown in the Chinese economy—push down gold prices too, because they lower inflation expectations and reduce demand for gold as a luxury item. This is one global meltdown that's always just around the corner.
Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.