After posting nearly a 30% loss in 2013, gold prices are ending this year nearly unchanged. With just one trading session left in 2014, the SPDR Gold Trust ETF (NYSEARCA:GLD) is nearly flat this year. On Tuesday, spot gold prices climbed more than 2% amid geopolitical tensions. The precious metal was also helped by a slightly weaker dollar and some year-end window dressing from funds. For the year, spot gold is down around 1%.
Gold has been extremely volatile this year. The precious metal initially benefited from geopolitical tensions in the Middle East and Ukraine. However, a stronger dollar pulled back prices in in the second half of the year. So what is the outlook for gold as we enter 2015?
The biggest concern for the global economy heading into 2015 is deflation. Deflationary pressure has been further accentuated by a sharp decline in oil prices. Deflation is the biggest worry for the euro zone. In November, annual inflation was 0.3% in the region. Meanwhile, growth remains anemic. In the third quarter, the eurozone grew just 0.2%.
The European Central Bank (ECB) has already announced some measures in 2014 to boost economic growth in the region. However, it has not yet unleashed the kind of measures seen in other advanced economies like the U.S. and Japan. However, 2015 might see the ECB finally launch its own quantitative easing program even as Germany continues to oppose such measures.
As the ECB considers further loosening of its monetary policy, the talk in the U.S. is about an interest rate hike. The Federal Reserve, in its most recent monetary policy statement, changed its message from keeping rates low for a "considerable period" to the central bank will be patient about policy changes. The Fed is certainly in no hurry to hike rates, especially in the current environment where the global economy is weakening. However, if U.S. economic data continues to remain strong, a rate hike can be expected in the middle of next year.
The Fed has already wound up its $85 billion a month quantitative easing program this year. All of this has strengthened the U.S. dollar this year, and given the likelihood of a quantitative easing program in the eurozone and an imminent rate hike in the U.S., the greenback will remain strong. This, of course, is a negative for gold.
The key driver for gold prices, as I have discussed earlier, will be physical demand in Asia. India recently relaxed its gold import rules, which should boost demand in the world's largest consumer of physical gold. Indian consumers are also benefiting from lower oil prices. Demand in China should remain strong as well. Strong physical demand will continue to provide a floor to gold prices in 2015. The floor has been at around $1,100 an ounce. However, a stronger dollar will keep a lid on prices in 2015.
Given that prices are likely to remain range bound next year, I continue to believe that gold miners with lower all-in sustaining costs are good bets.
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