Gold dips – but don’t give up on it

The gold price has tumbled by more than 10% this year, slipping from a peak of around $1,360 per troy ounce in January to $1,217 last month.

Has gold lost its function as a safe haven in times of crisis? Many investors may be asking themselves this question. Given concern over another potential euro crisis, some central banks' ongoing quantitative easing or money printing as well as the threat of a potential global trade war, you would have thought there were plenty of reasons to buy gold. Nevertheless, the gold price has tumbled by more than 10% this year, slipping from a peak of around $1,360 per troy ounce in January to $1,217 last month.

Don't expect prices to recover anytime soon, says Simon Constable in Barron's The strength of the dollar is likely to keep a lid on any rally. The inverse relationship between gold and the dollar index is a recurrent feature of the gold market. A stronger US currency makes gold more expensive to investors holding other major currencies.

The crucial factor, however, is the outlook for real, or inflation-adjusted, interest rates, especially in the world's biggest economy. The strong recent data has more than offset jitters over a trade war and points towards further rate hikes. That makes gold less appealing because it offers no yield. Bear in mind, however, that inflation could soon gather strength (see page 14), so gold may regain its shine.

A surge in inflation in turn implies unexpectedly quick rate hikes and swooning markets always good news for a metal that thrives on bad news.

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