Gold loses its shine as positive US data signals move away from safety

Kathleen Brooks
NOW could be the time to go short on gold. After a stellar performance during 2010 when the precious metal reached a record high of more than $1,200, the positive trend could be about to come to an end.

Investors sold off gold futures yesterday as markets await a spate of economic data releases from the US squeezed in before the Christmas break which are all expected to show signs of recovery.

GDP data is expected to re-confirm that the US exited recession in the third quarter, and annualised growth could be as strong as 2.7 per cent for the entire year. Personal consumption data in November is expected to have grown 0.7 per cent and durable goods orders are also forecast to rise.

Strong economic data as we head into 2010 is bad news for gold, which has benefited from its status as a reliable source of value during the recession. As the global economy looks as if it is turning a corner, investors might abandon gold in favour of riskier assets that offer lucrative returns.

Another major factor weighing on gold is the US dollar. Gold is denominated in dollars, so when the currency falls in value (as it did for most of this year) it means the number of dollars required to purchase an ounce of gold increases. This is one of the reasons why gold has scaled new heights this year, but it could also be one of the reasons for its fall.

As the US economy has started showing signs of life the dollar has risen. This could be the start of a change in trend for the greenback, which would put downward pressure on assets denominated in dollars, including gold.

The improvement in sentiment towards the US economy has led to speculation about when the Fed will raise interest rates. The US central bank mentioned the improved economic conditions in its meeting last week, which caused a stampede among investors to buy the dollar and sell gold.

The Fed also said that it is not worried about inflation – another big driver of gold demand since gold is seen as a good store of value against rising prices – which could dampen investor appetite. Inflation rates in the developed economies remain low and are unlikely to rise until the global growth outlook fully recovers.

Economic growth and the dollar are two of the main drivers of the gold price, however, it also moves on internal factors. As the price of gold has increased, mining companies have tried to boost production to cash in on record prices. But increased production next year means there will be more supply on the market, pushing down the price.

Gold mines are expected to increase production to 75 tonnes a year in Mexico, and Russia’s production is also expected to rise by 11 per cent, according to the Russian Gold Industrialists Union.

Saxo Bank, the Danish investment bank, predicts gold will collapse to $870 dollars next year as part of its “outrageous predictions” report. But a weaker gold price might not be beyond the realms of possibility.