Emerging consumers will give gold a lift

Gold slumped to a three-year low recently. In the short-term, the odds of a significant recovery look slim. Demand for paper gold assets, such as exchange-traded funds (ETFs) and futures, has waned. The US Federal Reserve's intention to ease up on money printing implies higher real' (inflation-adjusted) interest rates and a lower risk of inflation in future.

On top of this, the global economy gradually seems to be returning to normal, which reduces the appeal of an asset seen as a safe haven in hard times. And potential demand for gold in Asia has hit another short-term obstacle: India has cracked down on gold imports as part of a drive to lower its current-account deficit.

However, gold is hardly a write-off and not merely because the macroeconomic environment could easily deteriorate again. Another important factor is that demand for paper gold investments will become a less important driver of gold prices in future, says Bank of America Merrill Lynch (BAML), because "higher physical demand from increasingly affluent emerging markets."

Article continues below

Try 6 free issues of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

China's demand for gold jewellery, bars and coins, for instance, hit a record in the first quarter of 2013, helped by both the liberalisation of the domestic gold market and inhabitants' growing spending power. By 2016, reckons BAML, the influence of emerging-market consumers could have grown so much that merely a third of current gold investment levels would be consistent with prices of around $2,000 an ounce. Note too that central banks in emerging markets continue to buy.

Given all this, says Capital Economics, there is scope for gold to hit $1,320 by the end of the year and $1,400 by the end of 2014.

Explore More

MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.