The price of gold may continue to languish

Gold may stay low. We still see more factors working against it than for it. Though you might hold a little gold for diversification purposes, remember its drawbacks.

In November, gold fell below US$1,200 an ounce. This is far below the peak price of $1,908 an ounce it reached on August 22, 2011. We still see more factors working against gold than for it.

One factor working against gold is selling by investors who have concluded that it’s the wrong investment at this time. It was feared that very loose monetary policies around the world would drive up inflation. But inflation is very low in many countries and remains outright deflation in Japan. Deflation hurts the price of gold.

Some investors distrust paper currencies, particularly since they’re not convertible into gold. But Canada’s federal government has eliminated its budget deficit—despite lower oil prices. The deficit in the U.S is down significantly. So there’s less risk of debasement of both North American dollars. Europe has pledged to “do whatever it takes” to protect the euro. As a result, some investors need not hold much gold to protect against paper currencies.

Gold fails to generate income

A third factor working against gold is that it produces no income. Dividend-paying stocks and interest-paying bonds do provide income, of course. This can help retirees, in particular, pay their bills.

A fourth factor working against gold is sales by the International Monetary Fund. Selling gold enables the IMF to raise cash and assist countries.

A fifth factor working against gold is the rising U.S. dollar. The price of gold usually moves in the opposite direction of the U.S. dollar.

The price of gold is notoriously cyclical and unpredictable. The industry itself didn’t foresee the plunge. Sales by South Africa or Russia to raise money, for instance, would hurt the prices of gold.

Other factors tend to raise demand for gold. One is the popularity of gold jewelry, particularly in countries such as China and India. Demand for gold jewelry has fallen in 2014. In the long run, as middle classes in emerging markets grow, the demand for gold could start to outstrip the supply of gold.

A second positive factor is higher demand by what’s known as the ‘official sector’. That is, many central banks would rather hold reserves of gold instead of reserves of dollars or euros.

Lower gold prices make it less profitable to produce the yellow metal. It can also make it unprofitable to work marginal mines. And lower prices tend to depress gold scrap recoveries. Lower supply is supportive of the price of gold over the long haul.

We have five gold producers we currently rate as buys: Senior producers Agnico-Eagle Mines (AEM—TSX; NYSE) and Goldcorp Inc. (G—TSX; GG–NYSE), Intermediate producers New Gold (NGD—TSX; NYSEMKT) and Semafo Inc. (SMF—TSX), and small producer Richmont Mines (RIC—TSX; NYSEMKT).

Alternatives to stocks are gold exchange-traded funds or bullion. Just remember that given gold’s drawbacks, it’s best to hold only a little to diversify your portfolio.


The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846