There are significant challenges to gold prices increasing in 2013. In fact, I believe that gold prices should move down in 2013 because of five strong headwinds, elaborated in this article.
1. Poor Demand
Nearly 50% of world gold demand comes from India and China. Demand in India is down because of concerted efforts from the government to push down gold imports. The government of India has restricted banks from issuing loans to buy gold, and has been steadily increasing the custom import duty on gold. At the same time, demand in China is down as the economy remains weak, putting pressure on discretionary income. Inflation expectations are low and equities seem ready for a rebound in 2013, drawing investments away from gold.
2. Increased Supply
Just when demand is falling for gold, supply of gold is expected to go up in 2013. As reported by Kitco:
Gold-mine supply is expected to rise in 2013 as analysts see new projects coming online to add to 2012's production totals.
Rohit Savant, a senior commodities analyst with the consultancy CPM Group, said he sees gold-mine supply rising 4.3% from 80.5 million ounces to 83.9 million ounces in 2013.
3. Low inflation
Inflation expectations worldwide remain low. Inflation expectations for the U.S. remains around 1.5% for 2013 as consumers keep deleveraging. According to ECB President Mario Draghi, EU inflation rates are expected to fall below 2% in 2013 as well. China inflation is at a tame 2%, while Japan is outright in negative inflation territory.
4. Stable U.S. Dollar
Even as monetary expansion continues in the U.S., the dollar is not under significant pressure. This is because Japan is pursuing an expansionary policy, and the yields are negative in the EU zone, making neither the euro nor the yen a safety haven for fleeting U.S. dollar holders. China is likely to hold the yuan weak against the dollar, as it tries to get out of economic slowdown through better exports. For details, please read my previous article as to why a U.S. dollar crash is very unlikely in 2013.
5. Investment Alternatives
A large part of gold's rise in the past decade has been due to weaker performance by equities in the same time period. As the two major world economies, U.S. and China, come out of slow economic growth and two others, the EU and Japan, stabilize and pursue expansionary policies, global equities have done well in 2012. This trend is forecast to continue in 2013. As momentum investors get tired of poor performance from gold in 2012, they will likely switch to higher momentum equities in 2013.
Together, these five trends likely indicate a drop in gold prices in 2013. A few short choices are the SPDR Gold Trust ETF (GLD), the Market Vectors Gold Miners ETF (GDX), and the Market Vectors Junior Gold Miners ETF (GDXJ). In a future article, I will discuss whether the miners or gold itself is a better candidate to profit from weakness in gold in 2013.
Disclaimer: This is not meant as investment advice. I do not have a crystal ball. I only have opinions, free at that. Before investing in any of the above-mentioned securities, investors should do their own research, consult their financial advisors, and make their own choices.