Gold prices have tumbled to recent lows through November, ahead of predictions for a likely strengthening dollar. The recent tumble in gold and other precious metals has less to do with any perceived weakness in gold and likely investment opportunities as the dollar rises in the aftermath of the withdrawal of the US stimulus package. The eventual and inevitable tapering of the United States' stimulus plan will undoubtedly lead to a stronger dollar.
Through quantitative easing, the United States has been creating new money, thus increasing the money supply. As the money supply has expanded, the value of the dollar has dropped. Now, the Fed will likely taper its quantitative easing program in the near future, which will stem the flow of new money into the global financial system. This should cause the value of the dollar to rise, making it a more attractive investment. As this happens, some investors will shift their investments away from gold in favor of dollars.
Here's a quick recap on prices (all prices per OZ):
- Gold started the month at $1,315. The market trended largely downwards, ending at $1,252.
- Like gold, silver prices trended downwards through the month, dropping from $21.87 to $19.84 to close out the month.
- Through the first few days of December, both gold and silver prices have continued to slump.
Headlines
Beyond the likely end of the US stimulus package in the near future, strong economic indicators have also driven gold prices lower. Investors often retreat to gold when the global economy looks weak but many now believe that the economy is primed for a rebound. Lower than expect jobless claims in the United States, stabilizing conditions around the world, and strong performances in other indicators have sent prices into a free fall.
There are some indicators, however, that could cause investors to get cold feet. If so, gold would likely become an attractive investment once again. Particularly, consumer spending in the United States has been weak ahead of the holiday season. As the world's largest single consumer market, a drop in spending could cause a global slowdown. If poor spending numbers are mirrored in Europe and across the so-called “West”, markets could become turbulent.
UBS has slashed its forecasts for gold based on the factors outlined above. At the same time UBS cites artificially restricted demand from India, a major gold purchaser, as another reason to remain downbeat on gold. While the Indian government may indeed be temporarily restricting gold imports in order to support the rupee, this will likely only be a temporary move and demand will quickly return once restrictions are lifted.
Investment Outlook
Through the next few weeks, risk adverse investors may want to sit on the sidelines and watch markets and market indicators. If the global economy continues to recover, the U.S. will likely go forward with its plan to curtail its stimulus package. If it does so, gold and silver prices will most likely drop. This, however, could represent a great time to invest as prices are at recent lows. With gold and silver so cheap, an investment now could pay off big in the future.
Investors looking to add a bit of risk to their portfolio could invest in gold and silver now. With prices so low, it could represent a great investment opportunity. If holiday sales data remains weak then the global economy could take a serious hit. If so, gold and silver will start to look like a very attractive investment as investors shed stocks and similar equities.
The question investors need to ask themselves is how much risk they are willing to take? If holiday sales rebound, then investors will likely continue to shift their assets to stocks and financial equities. This will cause gold prices to drop. If the American government decides to go forward with tapering, then gold prices will almost certainly decline further. Yet, if the economy weakens and the Fed abandons its tapering program in the near term, then prices will almost certainly spike.
If you are looking to invest in gold or silver, these points are essential for you to consider. Make sure you keep a close eye on indicators throughout the month and be ready to move as opportunities arise. While markets will likely be turbulent, they might present excellent investment opportunities.
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