What does the future hold for gold?

As any successful investor will know, diversification and careful risk management are key to strong profit making, which is why it makes sense to include gold in your portfolio.

This precious metal has always been seen as a safe haven by investors – a hedge against economic disruptions and the go-to asset in times of uncertainty.

Supply and demand drives the price of gold, and on the demand side sentiment plays a huge role. If other investments start to look more attractive and more profitable, gold loses its appeal.

We can see this happening to some extent at the moment. In the last few years gold has been falling in price following a fantastic ten-year rally as investors look elsewhere in search of stronger returns.

So what does the future hold for gold prices and should investors shed their holdings in the precious metal or continue to value it as an important part of their overall investment strategy?

What's been happening to gold prices in the last decade or so?

The turn of the millennium marked the beginning of a shining decade for gold. In 2001, prices began to rise and the commodity made regular gains each year until, by 2009, its value had quadrupled.

Prices then continued to rise until around 2011, just as countries around the world were beginning to emerge from the global recession and start out on the road to recovery.

The last few years have seen gold begin to decline in value once again, and although there have been a few small hikes, generally the precious metal has been on a downward trend.

Speaking to the Wall Street Journal, George Gero, senior vice president at RBC Capital Markets Global Futures, explained that stock market gains have "siphoned" money away from gold.

Economic improvements have also led to reduced demand for gold. Growth in many nations has improved and there are growing expectations that central banks will raise interest rates again soon.

This has caused gold to lose some of its sparkle, as investors have slowly returned to bonds, hard currency and other assets that produce better yields. Consequently gold prices have descended.

That's not to say they have plummeted. They still remain well above their 2001 starting point and many would argue that they have simply experienced a correction, and certainly not a crash.

Where are gold prices heading?

What will happen to gold prices in the months and years ahead remains uncertain. Some commentators think they could drop further, while others reckon conditions are right for an increase in the asset's value.

Speaking to BullionVault, Bernard Dahdah from French bullion bank Natixis said he thinks gold prices "still have room to fall" because lower production costs are allowing more mines to remain profitable, which is leading to increased supply.

However, Nicholas Johnson from US investment firm Pimco told the website he believes gold could "really pop and move" since it is still cheap relative to the low yields offered by government bonds.

So opinion is split, and there are a number of factors that could pull gold in either direction in the near future – factors investors will be paying close attention to.

  • The US dollar

A stronger US dollar means it is more expensive for foreign investors to buy dollar-denominated gold, especially if their own currencies are weak relative to the dollar.

With the US currency making healthy gains of late, this could have a dampening effect on gold demand as we move into the second half of the year.

  • Interest rates

Generally, as interest rates rise gold prices fall, since gold earns no interest. So investors will be looking closely at GDP figures, inflation and the monetary policy decisions made by central banks around the world in the coming months.

At the moment, however, interest rates remain historically low and there is little sign of any immediate movement in any of the major developed economies.

  • Equities

The performance of equity markets, particularly in China, will have a bearing on gold prices. The Chinese are big buyers of gold and in recent years their heads have been turned by soaring stocks.

If the equity markets cool, the lure of gold could return and rising demand could bring prices back up. For now, however, stocks look to be in favour.

  • Fear

Fear is a powerful force. If investors are worried about economic stability they may run back towards typical safe haven investments like gold and away from the riskier investments. And of course, while things are looking brighter than they were back in 2008, there are still plenty of things to fret about.

One major worry is the ongoing Greek debt crisis and the potential consequences for the eurozone if progress to secure an agreement with the country's creditors stalls.

Whether investors should continue to hold gold or not depends on their risk profile. A prudent investor will see gold as an insurance policy, and with uncertainty still prevalent around the globe, having cover of this kind could be a wise move, even if it doesn't offer fantastic immediate returns.

 

Image credit: iStock

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