Gold's
Is Likely Headed Lower
There's
not much glitter to gold these days. Prices are trading at their lowest
since June, under pressure from a stronger dollar and expectations of
higher U.S. interest rates.
Gold was a
star after the financial crisis, with investors buying the metal to
protect their wealth against potential inflation or currency devaluation
as the Federal Reserve tried to right the economy with stimulus
measures. Neither of those outcomes came to pass, and now investors are
looking to higher-yielding assets, such as stocks.
The Fed is expected to end its
bond-purchasing program next month, and to raise interest rates for the
first time in eight years sometime in 2015. That's bad news for gold.
"Rates
have a strong influence on gold, given they represent opportunity costs
for the nonyielding metal," say analysts in a BofA Merrill Lynch Global
Research note. In other words, gold doesn't bear interest like bonds or
pay dividends like some stocks, so it has trouble competing with other
assets as rates rise.
The expectations
about the Fed's moves are also pushing the dollar to new heights, as
higher rates would attract investors looking for bigger returns. Each
time the U.S. currency gains, gold loses ground because the
dollar-denominated metal becomes more expensive to potential buyers who
hold other currencies.
The Fed's
policy-making committee meets this week. It is anticipated that the
committee will tweak the language of its post-meeting statement to
prepare the market for future rate hikes.
Gold
can't even count on Asia to prop up prices. China and India, the
world's top consumers of the metal, have scaled back their purchases
this year. The World Gold Council, an industry group that tracks supply
and demand, estimates the Chinese cut their gold purchases in the second
quarter by about half from a year earlier, while India's gold buying
fell 39%.
THE DECLINES REFLECT CAUTION
by buyers who piled into gold last year after prices fell steeply in
April. Their bets on a rapid price recovery failed to materialize.
Instead, gold is down 27% from 2013's peak, trading at $1,231.50 a troy
ounce Friday on the Comex division of the New York Mercantile Exchange.
"Reviving
demand from Asia will be needed if the gold price is to awaken from its
lethargic state and climb in any noticeable fashion," says a research
note from Commerzbank analysts.
Commerzbank
expects China and India to increase their gold imports in the coming
months and forecasts gold prices to end the year at $1,300 an ounce.
Gold purchases in India usually ramp up ahead of Diwali, a Hindu
festival and gold-giving occasion that falls on Oct. 23 this year.
But
other analysts say increased purchases from Asia would merely restrain
gold's losses. They point to the large number of speculative investors
who are betting on lower gold prices. Money managers held 58,545 short
contracts on Sept. 9, the largest amount since June 10, according to
data from the U.S. Commodity Futures Trading Commission.
"The
gold price is yet to return to last year's lows (although it is well on
the way), but U.S. dollar strength and a retreat in investor demand are
still expected to set the tone for the gold market over the longer
term," according to a National Australia Bank note. http://online.barrons.com/home-page
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