14 February 2014

Will gold head lower in 2014

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gold2013 saw gold post its first losing year since 2000 and its worst year since 1981. After gains of around 30% in 2007, 2009 and 2010, investors in gold are asking themselves whether the precious metal can reverse last year’s 28% decline or whether further falls are in store in 2014.

Before we answer this, let’s explore some of the reasons that gold lost its appeal during 2013:

  • The US Federal Reserve’s announcement that it will begin to taper its bond purchases has mitigated long-term inflation concerns (where purchasing value of money falls). This removed the need for investors to hold gold as a store of value.
  • A recovering US economy led investors to abandon gold in favour of equities which are relatively more appealing in an economic upturn.
  • The government in India – one of the largest jewellery-consuming markets – raised gold import tax to 10%, thereby curbing demand for the commodity.*

Currently, an environment of global economic growth but low inflation looks likely. In a rising interest rate environment, owning gold is typically more expensive as it is not an income-producing asset. Accordingly, the risk-reward balance is now skewed toward risky assets.

All economic indicators point to further losses for gold over the year.

*Consumption of gold in India accounted for about 30% of global demand in 2012, Global Demand Trends, World Gold Council, Full Year 2012

 

The author is an employee of Verante Financial Planning in Castle Hill, Corporate Authorised Representative of Magnitude Group Limited, Licence No 221557, Magnitude Group Limited ABN 54 086 266 202.

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