Despite all of the talk about China and India buying lots of gold (high demand) and how the precious metal is a limited resource (limited supply), I still do not like the commodity as a buy-and-hold investment at this time.
Yes, China and India love their gold, which is used for jewelry and prestige. But unless the speculators and traders jump aboard, I just don’t see why anyone would want to buy right now.
As I said in previous commentaries (see “Should Investors Hold Out for $1,300-an-Ounce Gold Before Investing?”), gold, in my view, isn’t an attractive buy-and-hold investment at its current levels around $1,235 an ounce; to me, the yellow metal looks interesting as a buy on a decline to the $1,200-an-ounce level or below, when traders can enter and sell on rallies.
The key driver of prices—inflation—is not an issue at this point, so this precious metal becomes a less interesting buy with no real reason to hedge.
Global inflation continues to be benign. In China, inflation is hovering around the three-percent level. India is experiencing inflation above seven percent, but its impact on the global economy is minimal. In the eurozone, inflation came in at 0.8% in December, according to Eurostat, which is well below the two-percent target.
The volatile Middle East is also absent of any major geopolitical risk at this time, which drives down the demand for safe haven assets such as gold.
Until we see a rise in global risk and inflation, I doubt any upside moves in the yellow metal will be sustainable.
Even with the low relative value of the greenback, the demand for gold is not that high.
A look forward at the futures market indicates gold prices will hold in the $1,240 range at the high point for 2014 and will run as high as $1,250 by December 2015. Futures prices are not expected to trade above $1,300 until 2017.
However, as we move along, inflation and interest rates will rise, which will drive up the demand—and prices—for gold.
Yet for the time being, I’d suggest your only strategy should be to trade gold on weakness and sell into strength, otherwise, I would not be a gold bug at this time.
Instead, I might look at buying silver, as the metal is used in numerous industrial applications, which means that the demand for silver will rise should the global economy continue to strengthen. To play a rise in silver, I might suggest considering an exchange-traded fund (ETF) such as iShares Silver Trust (NYSEArca/SLV).