Investing in Gold

Gold is weak but has potential to shine brighter after 2014

Gold is currently a bad, short term investment. It may remain in the range of $1,100 – $1,200 in the first two quarters of 2015 because of a very strong dollar.

Despite this, however, gold remains a necessary investment for investors who believe in its power during hyper inflation. Long-term investors of gold can take advantage of the precious yellow metal’s current price levels. Short-term investors, on the other hand, would need to wait for better levels and for its correction to happen in the coming months.

Factors that weigh gold prices down

Gold and the USD are inversely correlated and the following chart, which plots the monthly correlation between the aforementioned asset classes since the beginning of January so far, helps proving this point:

Correlation Gold-Dollar Index

The coefficient, if we exclude the very last part, has always been negative and, over the last 12 months, it averaged -0.82

The Euro and gold relationship, however, doesn’t work the same way. The Euro zone may do a huge monetary easing (probably something similar to what the U.S. did until The Fed’s easing a few months back) and this will weaken the Euro against the dollar. A weak euro means weak gold, since it will cost European investors more to buy the dollar-denominated metal.

The current strength of the U.S. economy will guarantee that investors will put their assets more into stocks even if the Euro-zone and China are not very attractive investments. Stocks will likely outperform gold until the latter bottoms out.

Gold prices are also being undermined by the looming interest rates hike in 2015. Short-term investors are taking their money out of gold because it doesn’t yield high interests. While most investors see an interest rates hike next year, some remain skeptical about the matter. Precious metal pundits believe that The Fed will not raise interest rates because when it does, the government would have to pay more interest on its debt. This would be very difficult, given all the money it has printed.

Gold’s possible turnaround

There is reason to believe that gold may shine brighter next year. Wall Street thought that gold would sharply decline below the $1,000 mark before the year ends, but it has increased to $1,200 partly due to China and Europe’s stimulus. This rally is just the beginning, as what most supporters of the precious yellow metal believe.

There’s also huge physical buying particularly in Asian countries, as well as several central banks around the world. In addition, demand for gold in China, despite the price slump of the precious metal, remains high. The precious yellow metal’s prices also spiked in the first two weeks of November because of worsening political turmoil between Russia and Ukraine. In November 7th, gold went up by 3.15% and 2.3% on November 14th. Gold’s gains in the aforementioned dates haven’t been upturned since then.

Jordan Roy-Byrne, editor and publisher of The Daily Gold Premium, is convinced that gold will skyrocket after it bottoms out. According to his interview with The Gold Report, gold may have an inflation-adjusted price of around $3,000 per ounce by 2017. Investors may read his interview with The Gold Report here.

Gold’s battle isn’t over yet when long-term output is considered. However, from a short-term perspective, it would be better to place investments in paper securities until gold reaches its bottom.

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