Here’s Why Gold Is Doomed

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After bottoming around $1,074 in July, gold prices have been fighting back over the last few weeks thanks to uncertainty in the markets. As of this writing, gold prices are around $1,120 an ounce.

gold
Source: istockphoto.com/djma

Gold bugs are convinced that the precious metal is coming back into favor amid the volatility we’ve seen in stocks lately. And with data from China looking increasingly troublesome and investors worried about how the Fed plans to move forward with interest rates, some investors are happy to hide out in gold for the time being.

However, when you look deeper, there are still huge problems for gold. The precious metal remains off more than 40% from its 2011 high, and more recently it’s down over 13% from its January high, even after the recent rally.

Gold just has too much working against it right now to be a good buy. Here are a few examples:

China: The story of China, for instance, is actually bad for gold. Volatility in Chinese equity is a symptom of broader issues at play. Take this recent New York Times headline — “China’s Big Spenders Pull Back, as Stock Market Shudders.” That lack of demand for gold jewelry and overall investment in China offsets any potential gain for the precious metal as an alternative asset in Western portfolios.

Deflation: Also consider the continued devaluation of the Chinese yuan as the latest in a race to the bottom for central banks around the world. The easy money policies are, in part, motivated by global deflation risks. In fact, Societe Generale Economist Albert Edwards recently warned that a “tidal wave” of deflation could result if China and closely connected economies in Asia continue to suffer. Falling prices for commodities and other goods naturally means falling prices for gold.

Weak Demand: Consider that in the second quarter, gold demand dropped 12% worldwide — including an ugly 25% decline in India. And according to a July report from GFMS, gold demand is at its lowest since 2009.

Ugly Charts: Technical analysis of gold prices shows support in the $950-$1,000 range (well below current prices), with the precious metal well below its 200-day moving average and stuck in a significant long-term downtrend. While the last few weeks have been a rare bright spot, it’s important to note that a few weeks isn’t enough to change this — and in fact, gold has already rolled back slightly in the last several days.

I don’t know what is next for the stock market, and it’s not unrealistic to expect further declines for major indices around the world. However, given the big forces working against gold here, I simply don’t think the precious metal has anything to offer investors.

If you want risk, stick with stocks — preferably those with little exposure to Asia and a decent track record of growth. If you don’t want that risk, consider short-term bonds or bond-like stocks.

But gold? Frankly, I don’t understand why it’s worth the risk given the sustained downtrend it faces right now.

Here’s a recent radio interview I gave on the topic, with even more detail:

[soundcloud url=”https://api.soundcloud.com/tracks/222200645″]

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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Article printed from InvestorPlace Media, https://investorplace.com/2015/09/gold-prices-doomed/.

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