Gold Loses Its Glitter

Coveted as a security for the future, a hedge against inflation and a haven in economic chaos, gold has played many different roles in the global investment market. Particularly since the start of the economic crisis in 2008, gold rose in value, touching a historic peak of $1900 per ounce in September 2011. As one of those rare assets with minimal liability it was no surprise that every astute investor held this precious metal in their portfolio.

With experts assuming that gold would break the $2000/oz resistance and even rise through to $2500/oz in 2012, it’s rather surprising that gold is instead in a corrective mode, trending between $1550/oz and $1700/oz. It has underperformed its other safety peers – like the Swiss Franc, US dollar, treasury and Yen.  So what is leading to this decline?

Firstly, investors prefer to hold the dollar as a safe haven during periods of instability. Especially now, with concerns that Euro-denominated asset classes are potentially unstable, dollar demand is increasing. Since dollar value is inversely proportional to gold, gold prices decline when the dollar is in demand.

The gold price is also determined more by demand than supply. India is probably the most important market for gold as it is the biggest buyer of gold, with individual holders holding an estimated $1 trillion-worth of the commodity. But when gold prices touched historic highs – as was the case last year – this price sensitive market started buying less.

Gold heading northwards was also indicative of a crisis-lockdown as speculators expected a Euro breakup. These fears have since been allayed and this has also contributed to softness in gold prices, which is not necessarily a bad thing.

So what’s the way forward for gold prices? Industry analysts are divided. Big brokerages like Goldman Sachs, Barclays and Morgan Stanley expect gold to move upwards of $1800 by the end of this year. Many say that gold’s movement will be largely determined by central bank policies, especially of the European Central Bank (ECB). Instead of focusing on dovish monetary policies and toying with just interest rates, if central banks buy government bonds or opt for QE3 in the next few months, it will boost gold prices. For the near future though, gold is expected to trade in a narrow range in this risk-averse environment.

Ultimately, as far as ancient investment wisdom goes, gold should be held as a long-term investment and not as a tool for short-term profits. Its true value lies in being a means of providing insulation and protection in a volatile economic environment.