The attention to gold has shifted to other assets. Although gold is consolidating at historically high levels, it won’t move higher, says Patricia Mohr, vice-president, economics & commodity market specialist for Scotiabank. “The reason gold has leveled out has a lot to do with a shift in investor interest away from gold and into U.S. equities,” Mohr says. “The other reason is recognition that the Federal Reserve Board does not need to further step up its quantitative easing to kick-start the U.S. economy.”
Edward Meir, senior commodity consultant to INTL FCStone, points out that how retail investors access gold could put on additional selling pressure. “So many retail traders access gold through exchange-traded funds (ETFs) that when they sell there is also a massive outflow from the funds themselves that buy physical gold to back the ETF,” he says.
Gero says we just haven’t had the inflation many were expecting and that to a certain extent drove the gold rally. “It could be six or 12 months down the road,” he says. Gero expects gold to remain range-bound in 2013, but warns that there could be a geopolitical shock that changes things. “I don’t see anything yet but something always happens to upend the cart,” he adds.
One possibility is what occurred in Cyprus this March when the government decided to go after people’s savings. Gero says there could be follow-through if a similar situation occurs in Italy, which appears to be the most vulnerable.
Meir agrees. “Cyprus is [contained], but if it spills over gold could perk up. Italy is a big question; so [are] Spain and Portugal. Basically the continent is not growing.”
The inflation picture is unclear, Meir says. Some people believe, “If all this [liquidity and quantitative easing] were going to cause inflation, we would have seen it by now.”
On the fundamental front Meir says central bank buying has been restrained and while jewelry demand has been good, the tax increase on gold imports instituted by India, the world’s largest user of physical gold, earlier this year could hurt demand .
Meir says the conflicting fundamentals (see “Demand drivers,” below) make it difficult to see how gold will perform for the rest of 2013, but adds that U.S. equities may be the big driver. “Basically it depends on U.S. equities — [they are] the new safe haven displacing gold.”