We think of gold as a relatively secure store of value. Even though that may be your initial thought, gold has been steadily declining for the past three years. And its future prospects are not the most optimistic of projections.
Gold Prices Tarnish
The last time fell for three consecutive years was in 1996-1998. This month alone, gold prices fell 5% and gold futures finished at its lowest level since 2010.
Why? What’s causing gold to tumble?
Well, for starters, the US dollar is getting stronger. When the dollar is stronger, it makes it more expensive for other currencies to buy gold. This makes less people want to buy, causing demand to fall and prices to fall right along with it.
Then there’s a more interesting factor. Leading global demanders of gold simply aren’t wanting to buy as much. For whatever reason. For example, if we look over to India, one of gold’s largest buyers in the world, a recent drought has left many without money to buy gold. With one of the biggest gold markets taking a hit, prices were set to fall.
Lastly, there’s the threat of a Fed interest rate hike. Yes I know, the Fed has been threatening to raise interest rates all year and has yet to complete their promise, but the mere possibility greatly influences gold prices. And in this case, it moves gold prices down.
Where Are Prices Headed?
Unfortunately, all signs point to further down. While we cannot be certain of the future, economic models tell us this is the most likely scenario.
First off, the dollar is likely to keep getting stronger. The stronger the dollar gets, the less appealing it becomes.
Foreign demand is also not likely to recover quickly. Gold imports are down 52% from the month of August. It may take a bit before the market rebounds.
Lastly, the looming interest rate hike will be the biggest factor putting downward pressure on gold prices. With higher interest rates, people are more likely to put their money in banks, where they receive a return on their money, versus investing in gold, where no return is guaranteed.
