Gold prices are down roughly 25% in 2013 and the precious metal has clearly lost some of its luster. But many investors are now asking: “Given the selloff, is this now a good time to buy gold?”
My answer: no. In fact, depending on their overall allocation, I believe investors should consider trimming their holdings, as regular readers of my weekly commentaries know I’ve been advocating for the past six weeks. While I still believe that the precious metal should be a part of a diversified portfolio, I see four reasons why gold prices are likely to decline going forward [see 25 Wild ETF Charts From 1H 2013].Tesla Joins NASDAQ 100: ETFs To Play The Upgrade).
2. A strengthening dollar doesn’t bode well for gold prices. When the Federal Reserve likely begins tapering its asset purchases this fall, the dollar should appreciate against other currencies, including gold (gold is arguably the oldest currency in the world).
3. Sentiment has clearly changed lately in the gold market. The positive sentiment toward gold that caused many to pour money into the precious metal over the past few years has shifted. Want evidence of this? Look no further than the abundance of articles and posts lately just like this one (also see 3 Simple Momentum ETF Trading Strategies).
Some of the positive sentiment toward gold over the last few years can be attributed to investors’ expectation of quickly rising US inflation, an outlook that did not materialize. With inflation stable over the last year and likely to remain modest in the coming year, investors’ desire to hold gold is subsiding and gold prices are dropping.
4. Demand for the precious metal may be declining. India is the largest single country consumer of gold, partly for cultural reasons and partly as a hedge against long-term inflation. However, India’s money supply growth, a leading indicator for the country’s long-term inflation and a proxy for the country’s gold demand, hasn’t grown lately. Meanwhile, the fraction of total gold output held by central banks around the world has continued to decrease over the last decade and a sharp reversal in this trend is unlikely.
To be sure, gold, like most other asset classes, is likely to remain volatile in the coming months amid continued investor speculation about the end of easy money from the Fed (also see How To Be A Better Bear: Short Selling vs. Inverse ETFs).
In addition, there’s always the chance that gold prices may regain their shine if US inflation seems more likely to spike, if people once again start questioning the survival of the euro and or if the world economy experiences another exogenous shock. But absent those scenarios, I’d continue to lighten up on the precious metal.
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