Given the selloff, is this a good time to buy gold? My answer is no. In fact, depending on their overall allocation, I believe investors should consider trimming their holdings. Here are 4 reasons why that is the case.
So asks Russ Koesterich (http://isharesblog.com/blog/) in edited excerpts from his original article* entitled Is Now A Good Time To Buy Gold?.
[This post is presented by Lorimer Wilson, editor of www.munKNEE.com and the FREE Intelligence Report newsletter (see sample here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Koesterich goes on to say in further edited excerpts:
While I still believe that the precious metal should be a part of a diversified portfolio, I see 4 reasons why gold prices are likely to decline going forward.
1. Gold prices are facing the headwind of rising real (adjusted for inflation) interest rates for the first time in years. An environment of rising real interest rates, like the one we’re in today, should create a less supportive environment for gold prices. This is because real interest rates, which equal nominal interest rates minus inflation, are essentially the cost of holding gold, an asset that generates no interest income. When real interest rate are rising, as they are today primarily thanks to an increase in nominal rates, investors holding gold are forgoing more and more interest income.
2. A strengthening dollar doesn’t bode well for gold prices. [With] the Federal Reserve…[having now concluded] its asset purchases…, the dollar should appreciate against other currencies, including gold (gold is arguably the oldest currency in the world).
3. Sentiment has clearly changed lately in the gold market. The positive sentiment toward gold that caused many to pour money into the precious metal over the past few years has shifted. Want evidence of this? Look no further than the abundance of articles and posts lately just like this one.
Some of the positive sentiment toward gold over the last few years can be attributed to investors’ expectation of quickly rising US inflation, an outlook that did not materialize. With inflation stable over the last year and likely to remain modest in the coming year, investors’ desire to hold gold is subsiding and gold prices are dropping.
4. Demand for the precious metal may be declining. India is the largest single country consumer of gold, partly for cultural reasons and partly as a hedge against long-term inflation. However, India’s money supply growth, a leading indicator for the country’s long-term inflation and a proxy for the country’s gold demand, hasn’t grown lately. Meanwhile, the fraction of total gold output held by central banks around the world has continued to decrease over the last decade and a sharp reversal in this trend is unlikely.[The above being said,] gold, like most other asset classes, is likely to remain volatile in the coming months amid continued investor speculation about the end of easy money from the Fed.
Conclusion[While] there’s always the chance that gold prices may regain their shine if:
- US inflation seems more likely to spike,
- if people once again start questioning the survival of the euro and or
- if the world economy experiences another exogenous shock,
absent those scenarios, I’d continue to lighten up on the precious metal.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
*http://isharesblog.com/blog/2013/07/08/is-now-a-good-time-to-buy-gold/ (©2010-2013 BlackRock. All rights reserved. Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist and a regular contributor to the iShares Blog)
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