New Delhi: In 2014, the yellow metal lost its sheen for the second year in a row, turning cheaper by over 10 per cent as rising stock prices and a stablising economy favoured other asset class over the so called "defensive" asset.
Though the precious metal initially benefited from geopolitical tensions in the Middle East and Ukraine, gains in dollar pulled back prices in the second half of the year. Analysts have mixed outlook for 2015. They believe a hike in interest rates by Federal Reserve could put the yellow metal under some pressure, but after that gold may end the year on a firm footing.
Data shows that gold has also failed as a hedge against inflation, as bank FDs have emerged as a good investment option. Even our Prime Minister Narendra Modi has said that the challenge for banks is to convince people to channelise savings from gold to fixed deposits (FDs).
So what will gold do in 2015 is a question that is top of mind of many gold investors, particularly during this period of the year. Given that gold hasn't been able to gain momentum after its 12-year bull market ended two years ago, an increasing number of investors are wondering how the gold market will perform better in 2015. Here in this article we have listed some bearish and bullish factors that may affect the demand for gold:
Bulls:
Analysts expect physical buying from Middle Eastern, East and South East Asian markets will take prices in a $1200-1250/oz range. However, some very bullish outliers are taking it towards $1,500. Here are some reasons:
Physical Demand: Given that the physical demand for gold in China and India were held back in 2014 amid rising stock prices and import controls, J.P. Morgan analysts said in their outlook for 2015 that the world's two largest bullion consumers, India and China, could see a revival in demand as eager consumers will further take advantage of lower prices.
Geopolitics: Some analysts say geopolitical crisis, be it in connection with Russia, Ukraine or elsewhere in the Middle East, Far East, in Japan, in China, could give a boost gold prices by 8 to 10 per cent.
End of Indian import restrictions: In November, the country removed its so-called 80:20 gold import rule. Introduced in 2013, its aim was to curb Indian gold imports, and it required traders to export 20 percent of all gold imported into the country.
Interest Rates: Despite expectations that US Fed will raise interest rates by next June and most expect it to tighten policy more than once in 2015, the potential for a recovery in prices through 2015 is much better than it was in 2014. However, Fed Chair Janet Yellen has said the Fed was unlikely to hike rates for "at least a couple of meetings", meaning April of next year at the earliest. Rising US interest rates increase the opportunity cost of holding non-interest bearing assets such as gold.
Bears:
Banks are expecting gold prices to hover between $1,050 and $1,090/oz for next year. Here are the reasons:
The dollar: The price of gold has an inverse relationship with the world's reserve currency, the US dollar. This means when the dollar firms, the dollar-denominated gold becomes more expensive for other currency-holders, which drives down demand and prices. Goldman Sachs expects the dollar will remain a key factor affecting gold price, with 2015 average prices expected between $1,050-1,090/oz.
Oil: Falling international oil prices weigh on commodity indices. A slump in oil prices boosts concern that inflation will stay low, thus limiting the metal's appeal as a hedge.
Economic growth: The concerns related to growth in Chinese, the European Union and Japanese economies could put the yellow metal under pressure.
Inflation: The disinflationary trend is likely to continue in the short run, which could result in major steps by central banks meaning highly inflationary phases. OR because of monetary policy, one should realistically expect alternately periods of inflation and deflation.
Bottom line for investors who want to buy gold
Assuming that there will be no massive disruptions to the global or domestic economy, 2015 can turn out to be a good year – if not great – for gold prices.
