They say beauty is in the eyes of the beholder. And what could be more beautiful than bullions of pure gold? Gold has always held a special allure for jewelry lovers. But it has also been a key investment commodity. Gold has been regarded as a crisis hedge, a currency hedge, an inflation hedge and a deflation hedge.
Since 2011, however, gold has topped out and has fallen almost 40 percent from its all-time highs, far below bulls’ anticipated targets. Silver, too, has crashed, along with many other base metals. Growth in developed and underdeveloped economies has slackened considerably of late, a reflection of the slowdown in the manufacturing industries around the world. In fact, at this point, there is no good reason for investors to hold gold in the U.S.
There are several reasons for the drop in gold prices. The expected inflation wasn’t enough to push up gold or silver. Indeed, on an inflation-adjusted basis, gold never reached its 1980 high, $2,300 in today’s value. Silver, with an adjusted inflation peak of around $110 per ounce, never got there either.
Another reason for the drop in gold prices is that the dollar did not crash, as some had expected, despite the massive easing by the Federal Reserve. The stock market didn’t crash either. In fact, it has reached all-time highs.
Gold Bulls
Gold bulls are portending that the metal could reach a low of $4,000 in reaction to the recent financial crisis and the current policies initiated by the Federal Reserve and other central banks. The more money put into circulation, the more the chance of a devalued dollar which can lead to inflation and ultimately, hyperinflation over the ensuing years.
However, even a cursory look at world events points in the opposite direction. One of the leading importers of gold over the last few years has been China. But even the Chinese appetite for gold has dropped despite lower prices after last year's buying frenzy, cutting its annual demand for a second time in three months. China consumed a record 1,065 tons last year, a 28-percent tumble in gold prices after a 12-year rally.
Russia, on the other hand, has been sending indications that it may increase its gold holdings in an effort to stabilize the ruble which has crashed. That could lead to a short term demand for gold in Russia but won’t affect the U.S. very much.
In fact, the opposite might just be the case. Given the differences in growth and interest-rate between the U.S. and the rest of the world, the dollar is likely to continue its rally, further pressuring the price on gold and silver and on all commodities. Just this week, gold prices dropped again, reaching a 4-year low. Gold futures for delivery in December fell 0.3 percent to settle at $1,159.10 an ounce at 1:40 p.m. on the Comex in New York. Earlier, the price climbed as much as 0.6 percent touching $1,130.40, the lowest for a most-active contract since April 2010.
Analysts are predicting that gold prices are set for a second annual loss, the longest slump since 1998. Although some see the increasing chances of gold dropping to $1,000, others are more optimistic. “The metal may average $1,200 this quarter,” Mitsubishi Corp. International (Europe) Plc said today in a report. Opportunistic gold buying, combined with physical demand in India and China, will support prices,” the company said.