“When the Fed stops easing and economic activity improves, that will weigh on gold,” said Tuxen of Danske Bank. “We’ll start to see that being priced in in the second half.”
Record-low interest rates and yields below the rate of inflation on sovereign debt may sustain demand for bullion, which generally only earns returns for investors through price gains. The Fed said rates would stay close to zero as long as unemployment remains above 6.5% and inflation projections are for no more than 2.5%. The jobless rate held at 7.8% last month and consumer prices gained 1.8% in November from a year earlier. The European Central Bank held rates at an all-time low of 0.75% on Jan. 10.
“The most important factor is negative real interest rates and we see no end in sight there for the next couple of years,” said Hitzfeld of UniCredit. “What is dangerous is if key interest rates rise the above inflation rate, but this isn’t anywhere in sight.”
There are no signs that the biggest investors are selling bullion. Soros Fund Management LLC, founded by the billionaire George Soros, raised its stake in the SPDR Gold Trust, the biggest gold ETP, by 49% in the third quarter to $213 million, U.S. Securities and Exchange Commission filings show. Paulson & Co. remained the biggest shareholder, with a stake now valued at $3.53 billion. John Paulson bet against the subprime mortgage market, becoming a billionaire in 2007.
Global ETP holdings stand at 2,620 metric tons, about 0.5% below the record set Dec. 20, data compiled by Bloomberg show. Since the first product was created by Graham Tuckwell and listed in Australia in 2003, the asset class accumulated more metal than the country’s mines produced in a decade. Only the U.S. and Germany hold more in official reserves.
Gold’s allure may weaken after the prospect of improving corporate profits drove global equities to a 20-month high Jan. 14. U.S. manufacturing rebounded in December from a three-year low the month before and sales of new homes rose to the highest level in more than two years. China’s factory output expanded in December at the fastest pace in 19 months and Luxembourg Prime Minister Jean-Claude Juncker said last week that “the worst is over” for Europe’s financial crisis.