Why have short-dollar/long-commodity trades punished gold?

“Consumers certainly are happy to see lower pump prices. But a lot of market-watchers are wondering if the weakness in commodities is a harbinger of deflation — or falling prices — in the broader economy. While analysts say that changes in fiscal and monetary policy by many nations should stave off negative growth, the financial crisis and sputtering global economy, combined with the losses in equities and commodities, have many thinking of the D-word.

Could it be the reason gold hasn’t revisited its March all-time high, $1,014.60 an ounce, despite the worrisome economy? On Friday, December contract gold on Nymex’s Comex settled at $718.20 an ounce, down 1.657% on the week.

The causes of commodities’ rout aren’t completely fundamental. Yes, industrial demand has slowed, hitting base metals like copper and nickel, and Americans are driving less, pinching oil. Still, Hussein Allidina, head of commodity research at Morgan Stanley, says that unwinding of short-dollar/long-commodity trades have punished commodities, gold included. Nontraditional buyers who previously helped to boost all commodity prices have headed for the exits to avoid further risk. Gold futures, specifically, suffered from margin-call selling and investors scrambling into cash, says John Person, president of advisory National futures.com.

While the gold-futures market might be lackluster, the retail cash market for gold coins and bars is robust, with many dealers offering what coins they have for sale at a several percentage point premium over spot.

Person says that, compared with historical averages, commodity prices remain high. ‘I’m surprised we’re not even lower. I don’t think there’s deflation from a historic standpoint,’ he says. ‘Based on a global financial meltdown, commodity [prices] are telling us it’s not as bad as it seems.'”