Some people love gold and believe it will shoot to USD 2,000 and beyond in the coming months as it becomes an even more attractive asset to hold. Others feel that they have missed the bandwagon and gold is too high for them to buy at these levels.
I am in neither of these camps and tend to think that gold will struggle to gain traction in the coming years. Does this mean that I am calling a top in the price of the yellow metal? While I think it could rise to USD 2,000 in the coming months, but I don't think it will last there long, so while we may not be at the "high" for gold quite yet, I don't think it is far away for the following five reasons:
1. De-leveraging and growth concerns in the Europe: Far from being a safe haven, gold has tended to rise when economic growth is strong or the outlook for future growth improves. The problem is that the West, particularly Europe, is going through a tough phase of economic adjustment that requires sharp "de-leveraging" or debt reduction over the coming months. After years of living on borrowed money countries like Greece, Spain, Italy, France and even the UK are tightening their belts and trying to ditch the credit cards and start saving some money. This should mean a period of lower growth rates than we have been used to for the next number of years, which could dampen inflation pressure. Since gold is considered an inflation hedge, when there is no inflation people don't need gold.
2. The fiscal cliff in the US: The US will run into the fiscal cliff on January 1st 2013 when a spate of Bush-era tax cuts and spending programmes are set to expire. If these are allowed to expire it could have a sharp negative impact on the US economy as taxes rise dampening consumption and government spending falls. Some analysts forecast a massive 3.5% contraction in GDP in the US next year if the US goes over the fiscal cliff edge. The November Presidential election in the US complicates the outlook even further as we don't know who will be in charge of the country during this critical period. Thus, since gold tends to struggle during economic shocks, it fell more than 20% in the immediate aftermath of the Lehman Brothers bankruptcy, the yellow metal may find it hard to sustain gains as we get closer to the cliff edge.
3. Stability in the Eurozone: The Eurozone authorities have taken important steps to eliminate the risk of the Eurozone breaking up with the ECB's bond-buying OMT programme. However, at the time of writing this programme had not been activated because Spain has not yet applied for a bailout. Thus, there is still a lot of political risk in the currency bloc. But if the OMT is triggered then the ECB has bought the governments of Europe some time to try and address the structural issues they face. This should protect the euro and reduce the need for gold to act as a currency alternative.
4. Central banks becoming increasingly ineffective: Loose monetary conditions around the world and the most recent round of quantitative easing in the US will not increase the attractiveness of gold in our view. Some people argue that QE3 in the US will erode the value of the dollar and gold will become the investment of choice as a hedge against currency debasement. However, there are so many central banks around the world loosening monetary policy and keeping rates extremely low right now that it could limit how far the dollar actually falls as a result of QE. Added to that central bank action is having less of an impact on economic growth (hence why the Fed in the US has had to try a third attempt) and there is no evidence to suggest that QE will boost inflation expectations any time soon. Thus, we don't see central bank action as having a material impact on the gold price.
5. Time for a sell off: Gold has been rising since 2001 and has had 11-years of consecutive gains, which is a fantastic run for any asset class. Gold may close higher at the end of 2012 than it was at the start of this year, but we don't see the gold price extending these gains in 2013 or beyond. From a technical perspective gold is due a pull-back after so many years in an uptrend, also in the last five years the pace of annual gains has slowed, suggesting there is some caution entering the gold market. But the fundamental reasons I mention above, including deleveraging in the developed world and weak inflation pressures could also ease upward pressure on gold.
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