Gold prices expected to stabilize: TD

The slump may be over, but returns will be smaller than over the past decade

By: James Langton
January 21, 2014 December 14, 2017
15:45

The bull market in gold is over, but so is last year’s severe decline, suggests a new report from TD Economics.

In its report, TD notes that gold had been one of the best performing asset classes over the past decade; until it slumped sharply in 2013, sliding 29% during the year. “It was not one fatal blow that brought down the yellow metal in 2013, but instead, a rapid fire of negative forces, with each successive bullet doing more damage than the previous one,” it says.

Those factors include expectations that the U.S. Federal Reserve Board would curtail its asset purchases; strong stock market returns; the introduction of import restrictions for gold in India, which is a major consumer of physical gold; and, a stronger U.S. dollar.

Looking ahead, TD says that it now expects prices to stabilize. It calls for gold to trade around US$1,175 in 2014, before rebounding slightly to US$1,280 in 2015. “We do not foresee another rout for gold in the cards for 2014-15,” it says, noting that prices are up by about 3.8% so far this year.

“Although some of the recent headwinds will ease, the outlook for the metal still harbours some challenges,” it notes, adding that it believes supply/demand expectations and fluctuations have already been priced into the gold market. “In light of all the moving parts, gold prices will likely stabilize over the next two years,” TD concludes, although there will be different forces in various markets.

For example, it says that stronger performance by advanced economies will reduce the appeal of gold compared with financial assets. Conversely, “emerging markets will likely still rely on the metal as a means to diversify foreign reserves and a hedge against U.S. dollar weakness,” it says. And, consumer demand in China, India and other markets is also expected to stay strong.

“From a portfolio perspective, there is still room for gold to help hedge against nasty, unexpected surprises. However, investors will likely see a smaller return on the precious metal than has been the case over the past decade,” TD predicts.