Stumbling gold will pick itself up again
There are still plenty of reasons for investors to hold gold as insurance.
Gold, after climbing for 12 years, stumbled badly in 2013. It lost 28%, its worst annual showing since 1981. And the near-term outlook is hardly auspicious. The US Federal Reserve is set to print slightly less money from now on, while in the developed world inflation has eased and long-term interest rates have risen.
So adjusted for inflation, yields are turning positive. All this implies that the global economy and financial system are gradually beginning to get back to normal bad news for an asset that thrives on bad news and doesn't pay interest.
Still, as Longview Economics says, gold fell sharply for two years in the mid-1970s before the long-term uptrend resumed, so gold's poor 2013 needn't mean its run is over. Emerging-market demand has proved resilient, albeit outweighed by sentiment among Western investors.
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
There is also ample scope for turbulence in the world economy, ranging from a flare-up of the eurozone crisis to potential turmoil in the Middle East.
Any setback to global growth which, given the huge Western debt load, could well be undermined as long-term interest rates gradually rise is likely to prompt further money-printing. Central banks are worried that much of the West is just one shock away from deflation, making further quantitative easing to counteract a slowdown all the more likely.
It's also still far from clear that all the money-printing we've seen so far won't eventually trigger inflation. The uncertain outlook means that investors need some insurance in the form of gold.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
-
Review: The Store, Oxford – purveyors of excellence
MoneyWeek Travel The Store is a luxurious, new hotel in Oxford that has set up shop in a former department store in the heart of the city
By Chris Carter Published
-
Seven ways the Budget could hike inheritance tax or capital gains tax at death
Chancellor Rachel Reeves could target death taxes by raising IHT and/or levying CGT on inheritances. We look at some potential moves in the Autumn Budget
By Ruth Emery Published