Gold has fallen back from its three-month high of around $1,400 an ounce, with hopes that military action in Syria could be averted causing the latest price drop. But other factors influencing gold also point to a subdued performance over the next few months, reckons Fxpro.com’s Simon Smith.
For starters, real interest rates have been rising globally over the past six months. Investors will be more reluctant to hold gold, which pays no interest, if they can get a real return on other assets. Higher interest rates are also a sign of a gradual return to economic normality, which is not good news for an asset that thrives in bad times.
There is another headwind for gold: dwindling inflation. Inflation in the OECD area as a whole is at a four-and-a-half-year low.
Meanwhile, solid emerging-market demand for gold – 50% of consumer demand stems from China and India – looks set to be undermined by the slide in the Indian rupee, making gold more expensive to consumers.
All told, says Smith, gold could see its first down year in 13 years. But we’d still hold on to the yellow metal. We’d be surprised if we’ve really heard the last of inflation, and given the scope for instability as interest rates normalise or the euro crisis returns, holding some gold as portfolio insurance could well prove a canny move.