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.”
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.