Investors need to be aware that the gold market is not working in the direction of the USD. The US dollar index has been declining for the past few months and this could take a toll on gold prices.
And so, with gold prices already sliding lower, it looks like investors should gear up for another round of shrinking price expectations, at least in the near term. In order to keep things bearable, it is important to know what’s going on and why this might happen.
In the long term, gold is seen as a hedge against inflation. With recent economic developments and decisions (like the tapering of asset purchases by the Fed), a lot of people are concerned that inflation might be heating up. This could explain why gold prices have been on an upward trajectory for quite some time. Combine this with the fact that gold is considered as a “haven” in times of crisis, and you end up with a market that is working in favor of USD bearishness.
Back to today’s situation
Where there are rising concerns about inflation, but it does not look like there will be strong evidence to back it up any time soon (the latest CPI data from Japan came out lower than expected). Couple this with the fact that the Fed is slowly starting to unwind its quantitative easing program and you get a picture of how gold prices might start to decline.
To date, gold has been having a good run and this could be attributed to weakness in the USD. But in recent times, there are signs that it is not going to work in favor of bears either. All things considered, investors need to be aware of what’s going on and they should avoid being swayed by gold price hype.
Are you saying that gold prices are overbought? Is silver also in a “normal” territory?
Both bullion and silver prices are excellent right now. However, this is not a normal situation and it might not last forever. While we don’t think that they will go anywhere near their highs of the last few years, we do believe that they are far from the end of their upward price trajectories. If you want to take advantage of these conditions, make sure you do it while they’re still here.
What about the longer term? Is gold in a good position?
Well, that’s a complicated question. On one hand, you have the current situation where there are fears in the market about increased inflation expectations. These fears could be feeding off of existing conditions (like pent up demand for commodities). So if these fears subsist, all is not lost for gold and this would mean that the current rally is not a bubble. On the other hand, gold might want to accompany the USD on its path lower too and this might not bode well for gold going forward. If you’re looking at it from a long-term perspective though, it looks like there are still high expectations for inflation down the road. So gold will be a major player in this rising USD trend, but not necessarily at its peak.
What do you think then?
Well, the current situation is perhaps similar to the one we saw with gold late last year. In this instance too gold ran up against a bearish USD and started to decline along with it. While some prices were lower at that time, others (like gold) were still well above where they were in 2011. So it is difficult to predict how high gold prices are going to go and what kind of move they will make as they slide lower in the coming months/years.
