Gold lost almost 10% last week and has slid below $1,300 an ounce for the first time since the autumn of 2010. The near-term outlook isn’t good. The US Federal Reserve said last week that it was likely to end its money-printing programme next year, which investors reckon makes a rise in inflation less likely.
The prospect of tighter monetary policy implies things are getting back to normal after a crisis – not good news for an asset that thrives on bad news. “Gold traditionally appreciates during periods of ‘cheap money’ policies” and is vulnerable when they end, says HSBC’s James Steel. The rising dollar, reflecting a slow US recovery, is another headwind as gold is priced in dollars.
But investors should keep 5%-10% of their portfolio in gold. Central banks have printed an unprecedented amount of money and injected it into the world economy. Just because a jump in inflation hasn’t happened yet doesn’t mean it won’t and it will be difficult to withdraw liquidity without turbulence.
Volatility in markets, sharp jumps in long-term interest rates and another banking crisis as higher rates trigger increases in bad loans are all potential pitfalls. Nor is the euro out of the woods. Investors may yet remember why they once liked gold.