2015 May be Another Tough Year for Gold

After two rough years for precious metals (2013 and 2014), at least in dollar terms, many analysts expected 2015 to be the year when things turned around for gold and silver.  That could certainly still turn out to be the case, but at the moment most analysts expect gold and silver prices to remain relatively flat until some of the key macroeconomic factors have sorted themselves out.

The main drag on prices is the possibility of higher interest rates.  Financial experts continue to read the tea leaves of Federal Reserve meeting minutes and statements from Fed members to try to discern if and when interest rates will rise in 2015. 

Since last year there has been a consensus that the Fed would finally start raising rates this year, though the increases are widely expected to be very small.  But those expectations have been widespread enough to contribute to a lot of volatility in financial markets, which are also rattled by increasing geopolitical tensions and concerns about a global economic slowdown.

In a rising rate environment, gold would be expected to decline in value as assets that pay a yield become more attractive, but whether a small rate rise would have that impact remains to be seen, especially for those who see gold as a hedge against financial instability.

The dollar’s rise is another factor since it puts a drag on our exports, which translates into fewer jobs and lower economic growth.  Moreover, raising interest rates at a time when the dollar is at multi-decade highs against other currencies could also hurt the economy, as it would cause the dollar to rise even further.

And don't expect the high dollar to last forever, or to necessarily translate into lower precious metal prices, as it often has in the past.  

That is because of Asia's growing role in this arena.  Already, the World Gold Council reported that in 2013 almost 80% of global physical demand for gold came from Asia.

For now, precious metal prices are determined much less by traditional supply and demand factors and far more by futures trading in which Western financial organizations remain dominant.  But over the long term, expect China and other Asian countries to be increasingly important players in this area.   

It is probably best to think of gold and other precious metals as a long-term hedge against financial instability, inflation, and currency depreciation and not to get too caught up in the day to day market.  

But if prices do remain sluggish, expect that to continue to be a drag on the coin market outside of major rarities.