The latest recovery of gold price is likely to benefit investors of gold ETFs such as SPDR Gold (NYSEMKT: GLD) and iShares Gold Trust (NYSEARCA: IAU). Leading gold ETFs have rallied in the past several weeks after they declined during most of 2013. Despite this recent rally, Analysts remain skeptical about the potential recovery of the yellow metal in 2014. What are the main factors that could affect the direction of gold price in 2014?
The weak gold market has reflected in the decline in ETF’s prices: SPDR Gold lost 7% of its value during November-December; iShares Gold Trust fell by 8.4%. Further, the demand for these ETFs also diminished as their gold holdings tumbled down by 11.6% and 8%, respectively, in the fourth-quarter of 2013. On a global scale, during the first three quarters of 2013, total ETFs’ demand for [l5] gold fell by 696 tons. In comparison, in the similar time frame in 2012, the ETFs’ demand rose by 191 tons. Despite the recent recovery of gold price during January, the demand for these ETFs continued to diminish: iShares Gold’s holdings fell by 0.6% during the month; SPDR Gold’s gold holdings decreased by 1%. Looking forward, the demand for gold as an investment could be determined by the following factors:
- The FOMC’s policy: The FOMC’s decision to taper its asset purchase program (also known as quantitative easing 3, or QE3) led to a sharp drop in the prices of gold at the end of 2013. The market reaction back in December may have been too harsh considering that QE3 didn’t pressure up the price of gold during 2013. The FOMC decided to cut down QE3 again by another $10 billion in its first meeting of 2014. Since QE3 didn’t pull up the price of gold, this could suggest that the Fed’s decision to cut down on its asset purchase program will have little adverse effect on gold in the long run. Therefore, even if the FOMC continues to cut down its asset purchase program, this is likely to have little long term effects on gold. Finally, the recently appointed Chairman of the Federal Reserve Janet Yellen is considered, much like former FOMC chairman Bernanke, dovish. Thus, Yellen might also decide to take additional expanding monetary steps to make sure the U.S economy continues to recover. If the FOMC come up with new monetary measures such as pegging long term interest rates or raising the inflation target, these measures could increase the demand for the yellow metal as a safe haven investment;
- The progress of the U.S economy: If the U.S economy continues to slowly recover, it could rally U.S equities and thus steer away investors from safe haven investments such as gold and silver;
- The Market sentiment: Despite the good year equities had in 2013, they have started off 2014 on a negative note. Moreover, the FOMC’s decision of tapering QE3 didn’t stop U.S long term treasuries yields from falling in recent weeks. The chart below shows the changes in 30 year treasuries yield and the price of gold.
This could suggest a shift in market sentiment towards risk aversion – investors taking less risk and investing is assets that are considered less risky such as U.S long term treasuries and precious metals. If this sentiment continues, it could benefit the price of gold;
- The direction of the US dollar: During 2013, the US dollar slightly depreciated against the Euro but sharply appreciated against the Aussie dollar, and Japanese yen. The decisions of Bank of Japan and Reverse Bank of Australia to expand their monetary policies contributed to the weakening of their respective currencies. If the US dollar continues to appreciate against leading currencies, this could result in a decline in the prices of commodities including gold.
- The demand for gold in China and India. These two countries lead the way in importing gold. In India, the government decided to raise import taxes on gold; this decision has curbed down the demand for gold in India : During the third-quarter, the country’s demand for gold fell from 219 tons in 2012 to 148 tons in 2013. Conversely, China’s demand for gold reached over 220 tons in the third-quarter of 2013, which is nearly 19% higher than last year. The increasing demand for the physical metal in China could play a secondary role in positively affecting the price of gold;
The future progress of gold will rely on the market sentiment, the U.S economy’s progress, the Fed’s policy and the demand for gold in Asia. These factors could play in favor of gold investor especially if the demand for gold in China continues to rally, the U.S economic progress slows down and the market sentiment leans towards risk aversion.
For further reading:
- Will Gold Recover from its Recent Fall?
- What Could Impede This Gold Company?
- Will The Gold Market Continue to Cool Down?
Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.