2013 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
