Gold investors beware - the precious metal could continue to fall in value for another eight years.
The gold price peaked in August 2011 at $1,883 per ounce, the culmination of a decade long bull run. Ever since the dot-com bubble burst, investors have poured cash into the so-called safe haven, pushing the price sky-ward. This gold bull market coincided with the "lost decade" in equity markets, when prices slid sideways.
But since the 2011 peak, the value of gold has fallen more than 30% to just $1,255 - and according to Dominic Rossi, Global Chief Investment Officer of Equities at Fidelity this is only the beginning.
Speaking at Fidelity's Outlook 2014, Rossi said that the strengthening US dollar has a negative effect on the gold price. "The US dollar is coming out of a 10-year bear market, which drove the boom in commodities. The debasement of the US dollar pushed investors into commodities and proved a tailwind for prices," he said. "Now we have a headwind as the US stock market and the US dollar recover - which will put downward pressure on commodities. I foresee the commodities market getting any better."
The mining sector has been in decline for two years now. As the value of commodities fell, so too did the price of shares of mining companies. There have been some positive corporate measures. Due to the low gold price, mining companies have been forced to make efficiencies, as margins have been squeezed. These include improved capital discipline, cutting back on unprofitable projects.
BlackRock Gold & General fund manager Evy Hambro said that the gold price is the single biggest determinant in performance in the gold shares. "Having said that though, the shares are at a very, very low rating point relative to history," he added. "So, if management can be brave enough to take some of the tough decisions to not produce some of the ounces that don't need producing focus on the profitable ones, or actually bring production down but profits up; simple things like that, they will release a lot of value in the space."
Should the gold price continue to fall for another eight years however, it will be very challenging for gold equities to squeeze out any growth.
Russ Koesterich, BlackRock’s Global Chief Investment Strategist said that low inflation in the U.S. meant that investors were simply not focusing on investments designed to hedge against inflation, with gold being a key example. "Gold prices have been falling in recent weeks, and the precious metal is now down around 15% since August," he said. "We’ve also been seeing recent outflows in gold funds— a noticeable contrast to last year when money was pouring in. Given that we expect the current environment of low inflation and modestly rising interest rates to persist, we would retain a cautious view toward gold."
Indian investors can invest in global gold and mining stocks via feeder funds DSP BlackRock World Gold Fund, DSP BlackRock World Mining Fund and PineBridge World Gold Fund.
Emma Wall is Web Editor for Morningstar.co.uk. The original article has been edited to make it applicable to an Indian audience.
