Demand for gold has floundered this year, with prices sinking while investors seek higher returns elsewhere.
With spot gold falling to trade recently at $1,163.70/1,164.50 per ounce from its 2014 peak of $1,388.20 in March, albeit up slightly from the April 2010 lows hit last week at $1,131.60, it’s no surprise that investors have fled the metal in droves for greener pastures.
Gold’s allure has diminished just as riskier assets have outperformed – while the Dow Jones industrial average hit an all-time high of 17,618.46 earlier today, holdings in SPDR, the world’s largest gold-backed exchange traded fund, have sunk to a six-year low.
As well, the recovering US economy – and the prospect of higher interest rates, possibly as soon as mid-2015, from near-zero levels after the end of quantitative easing – has powered the dollar to two-year highs against the euro. This makes commodities priced in the dollar more expensive and dampens gold’s credentials as a hedge against inflation.
When US interest rates rise, so too do the yields on bonds – which makes them more attractive than gold, which yields nothing.
And while the US seems be on the path to recovery, Japan and Europe are faring less well, forcing central banks to resort to unconventional means to stoke inflation and kick-start their ailing economies.
Japan recently extended its quantitative easing programme to 80 trillion yen per year, above its previous target of 60-70 trillion yen and, while the ECB has declined to resort to QE this month, president Mario Draghi has previously signalled that it may be forced to do so soon because it is running out of tools to return the bloc to health and stoke inflation.
But printing more money weakens currencies – moves towards QE by Japan’s or Europe’s central banks push the dollar even higher, weighing further on gold.
Physical demand for gold has also retreated this year, with both India and China – the two largest consumers of the metal – importing much lower volumes this year after a record 2013.
China has played a major role in recent years for supporting gold – when prices sank to $1,350 in April 2013 from close to $1,600, Chinese buyers were fundamental to its recovery back to $1,500.
But the country is well stocked after last year’s mammoth intake and, even amid low prices and physical premiums trading at a discount, buyers have not swooped in to pick up metal cheaply. Prices will have to fall towards $1,100 to spur buying, some sources have claimed.
In India, meanwhile, total gold imports are also set for a significant year-on-year fall because of import restrictions aimed at weaning the country off its addiction to the yellow metal.
Gold has a political risk premium that is rises and falls according to global tensions – in times of uncertainty, investors turn to assets that hold real value. Gold’s peak of $1,380 in June coincided with escalating Ukraine-Russia tensions and conflict in Israel and Gaza.
Prices have retreated since a ceasefire was agreed in Ukraine in September, while the situation in Israel appears to have died down. And while the threat of terrorist reprisals over attacks on militants in Iraq and Syria and of an Ebola epidemic continue to make headlines, the risks appear to be priced in for now.
Outside of a major economic disaster, a global pandemic or an escalation in one of the world’s political hotspots, gold looks set to struggle for a while yet.
(Editing by Mark Shaw)
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