Gold prices are down roughly 25% in 2013 and the precious metal has clearly lost some of its luster. But many investors are now asking: “Given the selloff, is this now a good time to buy gold?”
My answer: no. In fact, depending on their overall allocation, I believe investors should consider trimming their holdings, as regular readers of my weekly commentaries know I’ve been advocating for the past six weeks. While I still believe that the precious metal should be a part of a diversified portfolio, I see four 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. When the Federal Reserve likely begins tapering its asset purchases this fall, 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.