1. Gold loses lustre of old. What next?

Gold loses lustre of old. What next?

The new year may see a further decline in gold prices as metal loses inflation-hedge appeal

Updated: February 3, 2015 2:35 PM

Gold is considered a physical store of wealth, as it gives an opportunity to investors to diversify the investment portfolio and acts as an inflation and currency hedge. Let’s assess how it fared in 2014 and what’s  in store.

Year in review
Spot gold prices started 2014 around the $1,200/oz mark, then headed higher towards $1,400 in mid-March. Russia’s military intervention in Ukraine, rising gold investor index and physical demand from China in the first quarter led the rally towards $1,400. After briefly touching $1,390 in mid-March, prices started to decline and, then, corrected downward towards $1,250 in June. From there on, prices started to rally again, touching $1,350 in mid-July. However, they lost steam from July onwards and corrected to the extent of $1,130 in the first half of November. A combination of factors contributed to this — consistent growth in the US economy, strength in the dollar index, waning demand and geo-political tensions. Declining inflationary trends on the back of falling crude dragged gold prices further.

Outlook for 2015
Since oil prices have fallen to unsustainably low levels, the main cause of concern across the globe now is deflation. ECB is battling to revive the economy and the worry is whether cheap oil would send the euro zone into outright deflation. Japan is already printing money to prop its economy. However, the US economy is on a mend as the third quarter GDP growth came in at 5%, the strongest in 11 years. The US Fed has already tightened its monetary stance and the US economy is likely to be on track to raising interest rates sometime in 2015.

The price trajectory would be dependent on the diverging policies of central banks across the globe. Investment demand with SPDR gold holdings is waning and is at a six-year low. While falling crude bodes well for the global economy, a falling inflationary scenario, reduces gold’s appeal as an inflation hedge. The growth in the US economy, falling inflation hedge appeal and strength in the dollar index at large will be the major factor for gold prices to head lower in 2015.

For 2015, the upside potential for spot gold prices (CMP: $1175/oz) can be $1,340/oz while the downside can be seen at $1,090/oz. In the Indian markets, MCX gold futures (CMP: R26,602/10 gm) can move higher towards R30,000/10 gm while lower side can be seen at R24,400/10 gm.

What should retail investors do?
One should put 10-12% of the corpus in gold. The advice to retail investors would be to buy on every dip, taking into consideration the risk appetite, along with the complex set of factors revolving around the metal. Physical gold is worth holding because it’s a universal finite currency.

On the other hand, it involves a number of costs. The advice would be to wisely allocate money in this commodity as over-exposure might hamper the overall return of the portfolio.

By Naveen Mathur
The writer is associate director, Commodities & Currencies, Angel Broking

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