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."
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
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
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.
-
Christmas at Chatsworth: review of The Cavendish Hotel at BaslowMoneyWeek Travel Matthew Partridge gets into the festive spirit at The Cavendish Hotel at Baslow and the Christmas market at Chatsworth
-
Tycoon Truong My Lan on death row over world’s biggest bank fraudProperty tycoon Truong My Lan has been found guilty of a corruption scandal that dwarfs Malaysia’s 1MDB fraud and Sam Bankman-Fried’s crypto scam
