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Gold prices have fallen 7.5% since reaching a six month high in March as the situation in Ukraine remained unclear and U.S. equities rallied to the record high. Do you expect that we will see a further decline in metal's price since the U.S. economy is expanding?
Every year gold prices move through a seasonal cycle. At the beginning of the year, in January, a lot of fresh investor capital comes into the markets and drives up asset prices. This is known as the ‘January Affect'. In January we saw gold prices moving from below $1185 an ounce into the $1200's and then as you mentioned prices carried on to reach a six month high in March of $1387 an ounce.
From a seasonality perspective we are moving into a very bearish period for gold prices. Starting from May to August, gold prices tend to sell-off or consolidate.
From a fundamental perspective gold is driven by two-factors: fear and speculation. Right now there is growing speculation that the U.S economy is recovering and we are seeing positive sentiment in the labour market, manufacturing and consumer confidence, which are all important indicators of the economy's health. If the U.S. economic data continues to improve, then traders and investors will sell gold as their appetite grows for more risk-on assets like U.S. equities. Based on that I do expect to see future declines in gold prices.
On the flipside gold prices are also driven by fear and uncertainty, whether that is economic or geo-political related. The Russia-Ukraine tensions is certainly a fear driven factor that is currently helping support gold prices and aid safe-haven demand. If we take recent situation, for example – it was reported Russia had launched extensive military exercises near the Ukrainian border, gold prices at the point were trading at a 2.5-month low of $1,268 an ounce, when news reports emerged. Within minutes gold prices begin to soar reaching a 1-week high of $1,298 an ounce, climbing 2.3% or $30 within the U.S trading session. Moreover, it is very unclear when this tension between Russia-Ukraine will be fully resolved and for that reason, I expect that gold could be the biggest beneficiary. If this situation worsens, gold will be back above the $1,300 level very fast.
Some analysts say that long-term investors will gradually accumulate gold as they want to hedge against future inflation; however, in short term the metal may not make money. What is your perception on investing in gold at this moment?
In my opinion, this is not investors market, referring to the investors, who accumulate physical bullion. The strategy for investors regardless of the asset is simple - buy, hold and hope for the prices goes up. However, in the long-term I do not really think this is going to be the case for gold. At the moment gold is trading just below $1300 an ounce; the investors, who bought physical gold at $1921 an ounce in 2011 have experienced a significant losses.
With the U.S economy continuing to improve and the Federal Reserve pushing forward with its monthly tapering, I do not see gold prices getting back to the peak we saw in 2011. For that reason and based on the current market conditions, gold favours traders who are active in the paper market.
This difference, between a trader and investor is – traders can make money regardless of whether the prices of an asset like gold trades up, down or sideward by applying the right technical strategies. Paper trading is also liquid and gives the trader 100% control of their capital. Unlike investing in physical gold, which does not generate any cash-flow, it is not liquid and does not generate an instant return.
Taking that all into account, I would not invest in physical gold at this moment. I would trade gold through the paper market because that is where the money is being made right now.
Historically gold has ignited passions for centuries; although, for today's investors it looks like the yellow metal has been losing its allure. Do you think that gold's first annual decline in 13 years is just another market cycle or is it a permanent change in investors way of thinking?
Historically, every asset regardless of whether that is commodities, equities or real-estate tends to move through a 10-year market cycle. Every market goes through a bullish phase, corrections and consolidation. Gold has done very well through its 13-year bull cycle fuelled by weakness in equity markets, the credit crisis and global debt to name a few.
I certainly do not think gold will ever go out of fashion for several reasons - it certainly has a purpose as a hedge against inflation, a safe-haven during times of uncertainly and it also plays a role in a well-diversified portfolio. I would not agree with a statement that gold is losing its allure, I just think investors and traders are becoming savvier. They are looking at the markets intelligently and selecting the right assets that benefit them in the current market conditions.
Due to the recent economic climate and improvements in economies like the U.S – there is more allure for risk-on assets such as U.S equities. However, there is still a purpose for gold as we are seeing with the Russia-Ukraine tension.
What are your forecasts for gold price in the next one to three months and in longer time horizon (more than a one year)?
May is usually bearish for gold and is coined by the famous term "sell in May and go away". Nonetheless, in the short-term I would expect gold to trade within a range of $1293 - $1239 an ounce.
Historically, during the summer months of June and July we usually see the metals bottoming. During this period, we could potentially see gold prices re-test the low of $1180, last seen in July 2013.
In the medium term, moving forward from August, this generally tends to be a very bullish period for gold prices as the market enters the Indian festival and marriage season combined with the build-up to the Chinese New Year. Over the last 3 years we have seen gold demand from India and China significantly increasing during this time of year triggering a rally in precious metal prices.
Ultimately, I would expect gold prices to end the year in a range of $1200 - $1250 per ounce.