The Golden Era is Not Bright

Those who not long ago believed that gold would continue its ascent towards higher peaks now seem quite disheartened. The yellow metal has fallen out of favor with investors, and at least in the short and even medium term, a hopeful future is not predicted for it. Conversely, for investors looking towards longer horizons or willing to bet on unexpected events, gold still retains its luster. From 2000 to late 2011, the price of gold per ounce rose from $259 to $1924, increasing its nominal value more than sevenfold. Following this unprecedented surge, many savers and investors considered the advance of the yellow metal to $3,000 or even $4,000 per ounce inevitable. However, since then, the tide has turned, and gold has retreated step by step, falling below the symbolic threshold of $1,100 per ounce in the last week of July, fluctuating around $1,087 these days. In other words, in less than four years, the value of gold has dropped by about 43%. Reasons for the Decline The decline in the gold market, following an eleven-year period of unprecedented growth, stems from several factors: 1) The strengthening of the US dollar is one of the most important reasons for the fall in gold prices. Although the greenback is no longer the dominant currency it was in the decades following World War II, it remains the most powerful international currency, and its weakness or strength alters many international economic data. It should not be forgotten that central banks around the world still hold over sixty percent of their foreign assets in dollars. Experience shows that gold and the dollar usually fluctuate in opposite directions in terms of value. With a weakening dollar, gold's role as a 'safe haven' increases, and its appeal to savers and investors rises. Conversely, the strengthening of the US dollar against other currencies, which began about a year and a half ago, particularly with the prospect of rising interest rates in the dollar zone, diminishes gold's attractiveness. 2) Unlike other assets (stocks, bonds, real estate), gold does not provide income to its holder, and the benefit for buyers of this commodity is solely dependent on its price increase. A homeowner who invests their savings in purchasing an additional property can rent it out, and if property prices fall, they can rely on rental income and wait for better days to sell it. Gold's value rises when other markets lose their attractiveness for savers due to recession. Currently, the situation is the opposite. European and American stock markets are moving from record to record, and the real estate market in many major economic centers, including the US, is in a relatively favorable condition. In this context, the pull towards the gold market naturally decreases. 3) Gold thrives in inflationary conditions. In fact, with the emergence of price tensions or even with increasing signs of rising inflation in the near future, savers turn to gold to preserve their wealth, and the role of the yellow metal as a 'safe haven' is further strengthened. Currently, the average inflation rate worldwide is at a low level, and in developed countries, this indicator fluctuates between one to three percent per year. Importantly, despite the injection of hundreds of billions of dollars into the economic arteries by the central banks of the US, Europe, and Japan under the 'quantitative easing' process, inflation rates in these areas have remained low. This phenomenon also contributes to the reduced appeal of gold for savers. 4) With increasing economic risks, especially during crises, the value of gold rises, and savers turn to this 'safe haven' to protect their assets from danger. Currently, the last remnants of the major economic crisis of 2007 and 2008 are fading away. The economies of the US and the UK have practically reached acceptable growth rates. In the Eurozone, Germany is in a favorable position, and signs of recovery from recession are increasing in other regional powers. However, the crisis in Greece has not ended, and the entire Eurozone suffers from foreign debt. Nevertheless, contrary to expectations, this situation has not helped improve gold's position. 5) In the meantime, the quantity of gold demand from China should not be overlooked. Two significant events in this regard have caused the recent decline in gold prices to accelerate. The first event was the revelation that gold purchases by China are actually less than what industry insiders had assumed. It was believed that the Chinese bought between 400 to 500 tons of gold each year. However, recent official statistics from China show that in recent years, the average gold purchase from this country has not exceeded 100 tons per year. The second event is the slowing growth rate in China and the prospect of further reductions. With increasing signs of this event, the prices of many raw materials, including oil, have fallen, and gold, which is ultimately considered a raw material, has not been spared from this trend. Market Outlook for Gold Considering all these factors, the outlook for the gold market, at least in the short term, does not seem promising. Pessimism about gold's future is based on the assessment that, given the lack of inflationary tensions in the major economic centers of the world, the strength of the dollar, and the general decline in raw material prices, including the slowdown in economic growth in China, gold will remain weak for at least the next two to three years, and its fall below $1,000 per ounce is entirely possible. The pessimism regarding gold's short-term and even medium-term future intensifies when we consider upcoming economic developments in the US as one of the main influencing factors on the fate of the yellow metal. It is known that in recent months, speculation about an increase in the base interest rate by the US Federal Reserve has significantly increased. Following the crisis of 2007 and 2008 in the US, monetary authorities lowered interest rates to unprecedented levels to prevent further recession and facilitate a return to growth. Given the changing economic situation in the US, global markets are confident that the Federal Reserve will raise the base interest rate sooner or later. US monetary authorities are also creating the necessary psychological environment for this change with their statements. Currently, with a growth rate of 2.3% in the US in the second quarter, a favorable labor market, improved foreign trade balance, increased consumption, and better conditions in the housing market, the possibility that the Federal Reserve will raise the base interest rate by the end of this year to prevent the economy from overheating is very high. With this event, a flood of liquidity will pour into the US, and the dollar will gain even more strength, to the point that parity with the euro will not be unlikely. If this scenario materializes, further weakening of gold prices and its remaining below $1,000 per ounce over the next two to three years is entirely possible. Many speculations today consider this scenario seriously. However, pessimism about gold is not universal. Among market analysts, some from the renowned bank HSBC say that the price of gold will return to $1,250 per ounce in a year. Among gold market insiders, there are also those who assess the current market situation as the best opportunity to buy gold. From their perspective, the current global political and economic landscape is filled with potential dangers, and in this context, gold has maintained its role as a 'safe haven' to stay safe from these dangers. For those who accept this reasoning, the yellow metal remains attractive, especially as its price gradually approaches half of its price from four years ago.