Gold’s Shine is Fading

Andamento del mercato - 09/03/2015

Gold has classically served as a valuable component of any diversified investment portfolio, mainly as a store of value and hedge against uncertainty, both monetary and political. Qualified by its long use as a mechanism for exchange and finite supply, gold has been renowned for centuries as an investment tool. However, recent declines have investors scratching their heads in wonder as prices slide further to the downside. Gold has stood the test of time when it comes to storing value, so why now have prices fallen so quickly? The latest movements can be attributed to a myriad of factors, namely inflation and the value of the dollar. These considerations coupled with investor sentiment are the determinants of price direction at any given time.

Although much has been made of the recent rush to buy precious metal coins, the sheer volume of physical demand has had limited impact on prices. Typically speaking, investors look to gold to hedge against inflation or losses in a fiat currency. With inflation globally biased to the downside or even negative (deflation) in the case of some Asian and European countries, worrying about diminished value of fiat currencies is not as serious a concern. Inflation specifically would see purchasing power eroded over time which is not happening right now. It also serves as a significant hedge against quantitative easing which invariably causes a currency to depreciate. However, looking at XAUUSD, or dollar-based gold prices, the tumultuous drop has been accompanied by a strong appreciation in the dollar. With inflation levels exceedingly low in the US coupled with dollar momentum as of result of the interest rate outlook, there is substantially more room for gold prices to fall. A few reasons prices could rise are renewed inflation, another round of money printing, or geopolitical considerations like war. However, based on the current trajectory, gold prices will easily test $1130 and below if conditions hold.


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