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.
To be sure, 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.
In addition, 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. But absent those scenarios, I’d continue to lighten up on the precious metal.
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.