LONDON Gold prices are looking even more vulnerable after April's price crash, as rampant inflation expected from successive rounds of monetary easing fails to materialize.
The idea that record-low interest rates would damage paper currencies and boost inflation was a key factor pushing gold to record highs in the wake of the financial crisis.
Ultra-loose monetary policies are still in vogue, but gold prices have slid nearly 20 percent since the start of the year and are on track for their biggest quarterly drop in more than 15 years.
In recent months the Bank of Japan has unveiled its largest ever stimulus program, while both the European Central Bank and the Royal Bank of Australia have cut interest rates to record lows.
In the United States, despite hints that its quantitative easing program may be nearing an end, the Federal Reserve is still pumping $85 billion a month into mortgage-backed securities.
While inflation pressures have remained contained, stock markets have hit multi-year peaks in Japan and Europe, with record highs on Wall Street.
"What has occurred in Japan and elsewhere has in effect made the opportunity cost of holding gold greater than it was," Credit Suisse analyst Tom Kendall said.
He said there was no fear of inflation in the developed world for now, with the push by central banks to stimulate capital flow heading directly to equity markets.
"If investors are not concerned about having an inflation hedge, those assets that are trending nicely upwards and can deliver some yield are looking very attractive in comparison," Kendall added.
Gold is widely recognized as an inflation hedge, although not all analysts agree on its efficacy. An ounce of gold currently buys 14.8 barrels of oil, near the long-term average since 1960 of around 15, Reuters data shows.
The stimulus measures pursued by major governments since the financial crisis began to unfold in 2007 were seen at the time as classically inflationary.
WAITING FOR THE FLOOD
"There are no signs today that sustained inflation is on the horizon," Mitsui Precious Metals analyst David Jollie said. "U.S. inflation expectations are still around 2 pct, inflation in the UK is coming down, inflation in Europe is almost zero. So as an investor, you don't need to buy gold."
That doesn't necessarily mean that inflation pressures won't emerge eventually, he said. "If you believe the floods are coming in 10 years' time, you need to build a boat, but you don't necessarily need to build it now," Jollie added.
"A year out, if we are seeing inflation starting to tick up, and we see gold at $1,100 or $1,200 an ounce, people will be happier to buy."
Despite this year's retreat, gold remains expensive by historic standards, after a 12-year run of gains that took prices from $250 an ounce in 2001 to 2011's record $1,920.30 an ounce. Dealers say inflation would have to take off a lot to justify gold prices' fourfold increase in 10 years.
Easing measures in the euro zone, Japan and Australia have pressured their currencies against the dollar, helping push the dollar index to its highest in three years. That has weighed on dollar-priced gold.
"If you think your currency is going to devalue against the dollar, obviously buying gold is one option," Matthew Turner, an analyst at Macquarie, said. "Or you could just buy dollars."
Fed chairman Ben Bernanke said on Wednesday the bank may trim its bond purchases at one of its next policy meetings. If it does rein in QE, it is likely to further benefit the dollar, especially if other central banks are still in easing mode.
That bodes ill for gold. From a technical perspective it remains vulnerable to further losses, with analysts pointing up a potential retracement to $1,150-1,100 as its rally unwinds. Confidence in the recovery, while fragile, is in large part responsible.
"People clearly on some level think equities may have run too far too fast, and they may well still be concerned about the ultimate effects of monetary policy," Credit Suisse's Kendall said. "But for the time being, they're setting those concerns aside."
(Editing by Veronica Brown and James Jukwey)