2015 could be the year for gold to shine. Having recorded its all-time high above $1,920 an ounce in September 2011, the metal has been in decline now for nearly three and a half years and, consequently, its allure as a reliable hedge asset and store of value has been tarnished.
But while gold has been scorned by many Westerners – principally American and European institutional investors and short-term speculators – it has remained in favor almost everywhere else.
Long-term investors and savers across much of Asia – especially China and India, by far the largest and most significant national markets for gold – have remained true to the metal, buying most of the metal sold by Westerners along with much new mine production and old gold recovered from industrial scrap and recycled jewelry.
Moreover, a number of central banks have taken advantage of gold price weakness in order to diversify official holdings and minimize their exposure to the U.S. and European currencies.
As I have written at length in past commentaries, much of the selling has occurred in paper markets with traders exchanging highly leveraged IOUs rather than simply selling physical metal.
Western investors have also sold the real stuff, physical bullion, much from liquidation by gold exchange-traded funds (ETF). But it has been the sale of gold derivatives – futures, options, and other “promises to deliver” in dealer and other over-the counter markets – that has been most responsible for the steep three-plus years of declining prices.
Importantly, much of the selling action has been triggered by persistent negative sentiment, downward momentum, and other technical indicators – along with computer-generated “program” trading that facilitates short-selling of gold at key chart points where price weakness is likely to engender even more selling!
Two of the most significant bearish drivers of gold price in the past few years have been the long-lasting bull markets in both equities and the U.S. dollar. Together, the ascent of stock prices on Wall Street and the appreciation of the dollar in world currency markets have been tough competition for gold - compelling investors around the world to increase their “long” positions in these other asset classes at gold’s expense.
But, so far this year, the relative performance of equities has been in gold’s favor, and the yellow metal seems to be shaking off its inverse correlation to the dollar with both assets benefiting from their “safe-haven” status.
We expect these trends to continue over the course of the New Year – with gold recovering from three years of underperformance, as it resumes its long-term uptrend.