Gold Is DoomedGLD) and Market Vectors Gold Miners ETF (GDX) while they can.
Bearish headwinds may blow over the metal’s long-term prospects as an investment. Gold is likely to see further losses due to the threat of U.S dollar appreciation and slowing demand in China. It is reasonable to expect a drop below $1,200 per ounce before the end of the year.
Because the U.S dollar is the global reserve currency, the value of commodities move in the opposite direction of the dollar.
There are two powerful near-term catalysts giving the dollar strength, plus one long-term catalyst liable to push it further still.
Near-Term CatalystsThere is mounting international uncertainty – especially in Europe.
The shockwaves of Brexit are still being felt in the forex market, especially with the recent announcement of a firm date to commence the U.K.’s exit from the European Union. This development weakens the pound and gives strength to the dollar index, both directly and indirectly, as it fuels speculation that other nations will vote to leave the EU.
The dollar index is also strong on fears about an Italian referendum and the troubles with Deutsche Bank AG (DB), not to mention the European banking system in general.
The second near-term catalyst is China.
Chinese economic growth is slowing and this is devastating for both gold and the commodities sector overall.
Image by / pixabay.com
China is the world’s largest consumer of gold given the nation’s central bank hoards vast quantities of the metal. As Chinese GDP growth flat-lines, there is a serious danger of collapse in the gold market.
Long-term CatalystThe short-term catalysts are bad enough, but the risk of an interest rate hike before 2017 makes gold one of the worst investments to make at this current moment.
When interest rates are increased, the intrinsic value of the dollar increases (dollars become a higher yielding asset relative to other currencies). As mentioned earlier, when the dollar rallies gold falls.
Gold should be sold or shorted considering all these headwinds to the price of the metal.
Published on Oct 17, 2016By Will Matte
Posted in ...Market Commentary