M. Jensen: is buying gold a good idea?
By Mark Jensen
The decline in oil prices doesn’t make such asset as gold very popular. Why don’t investors want to hedge anymore? The reason is simple: they have nothing to hedge from. Traders usually use the precious metal as a refuge from inflation. Falling oil price, however, limits the growth in consumer prices and even put inflation under negative pressure increasing the risk of deflation.
There are all signs that deflation fears will stick at least in the first half of 2015. Official statistics shows that US inflation declined from 2.1% this summer to 1.7% in October. Data from the Billion Prices Project, a research project which conducts daily analysis of the changing prices in the Internet, show a significant and broadening plunge in consumer prices growth to just 1%.
It’s also very important to note that even though inflation in the US was low for a long time, inflation expectations were rather high with the Fed holding low rates and conducting quantitative easing. Now that US central bank has stopped QE, these expectations have declined and will no longer support gold.
So, XAU/USD might be slowly moving towards $1085 and lower. Note, however, that gold has strengthened versus EUR and JPY this year by about 10%, and may do more next year. China, Europe and Japan are expected to increase monetary stimulus in 2015. I don’t think that this will translate into growth of XAU/USD anytime soon as the Fed is expected to raise rates next year, but gold may certainly rise a bit more vs. EUR and JPY.