Threat of deflation has gold and gold-related Exchange Traded Funds (ETFs) reeling.

After reaching a record $1,033.90 an ounce in New York on March 17, gold has declined 31%, according to The Straits Times. The worst might have yet to appear as bank strategists are predicting that gold may drop to as low as $600 by the end of the year.

As we continue our epic credit crisis, commodities are seen as taboo with cash being the acceptable form of wealth.

In this past decade, gold has risen as much as 220%. Gold commodities were fueled by expanding economies, increasing demand of commodities in emerging markets, and the increasing risk of inflation.

U.S. government efforts to help banking system is attributed to the decrease in demand for gold. As commodities fell and demand for dollar-based assets rose, the gold bull market saw its end with gold being deflated like any other asset.

But there is a long-term plan for those faithful to the gold standard. In a couple of years, as central banks pump more than $1 trillion to ameliorate the credit crunch, inflation may ultimately ensue. If this happens, it is predicted that gold may reach $1,500 an ounce as investors flock to gold as a safeguard against inflation.

“Under deflation, cash and highest-quality bonds are the asset class of choice,” says Marc Faber, publisher of the Gloom, Boom & Doom report. Thish would explain the downward trend of gold and gold-related ETFs such as:

  • SPDR Gold Shares (GLD): down 13.8% year-to-date

SPDR Gold Shares

  • PowerShares DB Gold (DGL): down 15.2% year-to-date

PowerShares DB Gold

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.