* Volatility in gold slumps in line with other markets
* Price stagnation 'could go on for 5 years'
* Inflation dormant in major economies, for now
By Jan Harvey and Clara Denina
LONDON, Aug 20 Ultra-calm trading conditions in
gold are becoming self-perpetuating as a persistent lack of
volatility frustrates investors seeking a return, pushing them
further away from a market that analysts say could be becalmed
Gold, which saw a dramatic reversal last year after a
12-year bull run took prices to record highs in 2011, has seen
the spread between its daily price highs and lows narrow to just
$15 an ounce this year on average, from nearly $25 in 2013.
Implied volatility, an estimation of an asset's future
volatility, has dropped in gold to around 12 percent this month
from an average of 19 percent in August last year, and from
highs of nearly 60 percent in mid-2008.
With the dollar strengthening, equities showing a better
return, and signs of inflation still notably absent from most
developed economies, the metal has run out of reasons to rise.
"We are pretty unexcited by the outlook of gold," Charles
Morris, head of absolute return at HSBC Global Asset Management,
said. "It could stay in this range for another five years.
"If inflation is under control for a long period of time,
then gold will be under control for a long period of time, and
because you don't get a yield, it is a waste of money to have a
large position in gold."
Gold is not the only market to be losing momentum.
Volatility in the global foreign exchange market approached
historic lows in July, while average daily volumes dropped by
almost 14 percent, data from FX settlement system CLS showed.
"What the central banks have done to provide liquidity has
pushed down volatility in the commodity market, and interest
rates market, and indeed equities," Credit Suisse analyst Tom
Kendall said. "They all feed through to every part of the traded
economy, so it is a problem for FX traders, it is a problem for
interest rates traders, it's a problem across everything."
As an asset in its own right, gold does not lack price
drivers at the moment. The problem is, they are working against
Federal Reserve policy is slowly normalising after years of
ultra-loose conditions, which had fed into rising gold prices.
The U.S. central bank has signalled that it is ready to start
thinking about raising interest rates, probably next year.
That should be pushing prices lower, as should a rise in the
dollar index this year. But working against that is uncertainty
over the long-term inflationary effects of the monetary stimulus
measures that followed the 2008 financial crisis.
Gold has also taken support from outbreaks of violence in
Ukraine and the Middle East, which some fear may destabilise a
fledgling recovery in the European Union and push up oil prices.
The fact that this unrest has not done more to push prices
is adding to investors' caution over gold.
"There has been very little and short-lived correlation
between the Middle East problems, Russia and Ukraine with gold
itself," Adam Laird, investment manager at Hargreaves Lansdown,
"There is a lot of concern among smaller investors that the
market has not been able to react to wider political events."
STORE OF VALUE
Not all buyers are seeking price volatility. Those who buy
metal as a store of value, for instance, prefer a stable market.
This has particularly been true in India, historically the
world's biggest gold consumer, where buying dried up during the
violent price moves that followed the collapse of Lehman
But supply to Indian consumers has been constrained by
restrictions on gold imports as the government tries to get its
current account deficit under control, meaning its response to a
more appealing price environment has been limited.
Meanwhile buyers in China, which has recently overtaken
India as the world's number one gold consumer, appear much less
happy with price stability.
Consumer demand is not in any event going to lead to a
repeat of gold's scorching price rise of the last decade. The
doubling in gold prices in the three years to September 2011 was
overwhelmingly due to investment flows, as funds piled into the
metal as a haven from financial market risk.
What would turn gold around would be a significant rise in
inflation, which few economists see happening any time soon.
Until another clear driver emerges, investors prefer to stay on
"Essentially, you have plenty of supply, (and) demand is
likely to fall because of low volatility, rising interest rates
and a strong dollar," HSBC's Morris said. "You put all this
together and you think: 'why are people going to come running'?"
(Reporting by Jan Harvey; editing by Veronica Brown and Keiron