Gold’s Performance Trumps all other Asset Classes during the First Half of 2014

Gold Prices

While it would be an understatement to say that gold has had a volatile year, ranging in price from $1,187 to nearly $1,400 an ounce in March, it managed to top all other asset classes during the first half of 2014 with a year to date return of 10.27%.  This tops other major indexes and asset classes, such as the S&P 500 and Dow by a considerable margin, and edges out other top performing commodities, such as oil and silver.  The price of gold and silver posted strong returns yesterday primarily in response to a declining dollar, which historically has been inversely related to the price of gold and silver.

There’s reason to believe that the price of gold will continue to perform well through the remainder of the year for several reasons.  For one, we’re entering India’s wedding season, which is always a popular time for gold purchases.  Additionally, the newly elected regime in India is thought to be pro-gold, which may help to alleviate the punitive import taxes that are currently being levied on gold purchases.  Although, as Shivom Seth from Mineweb recently pointed out, the import tax may only be cut by 2%, at least initially, so this is a development that we’ll continue to follow.

Another reason to be bullish on the prospects of gold is that the inflation rate continues to inch up, and was reported at 2.1% in May, which is the highest rate in two years.  Historically, gold (and silver) have been excellent hedges against rising inflation rates.  Considering that the Federal Reserve’s asset base is still $4 trillion, which is a five-fold increase in just six years, the potential for higher inflation rates is a continued threat.

In addition to India’s wedding season and rising inflation rates, the conflict in the Middle East; most notably ISIS’ capture of major Iraqi cities, as we previously discussed, will continue to put upward pressure on oil prices, and potentially affect oil production.  Historically, the price of oil and gold has been highly correlated.  If, by chance, the Iraqi government becomes overwhelmed by insurgent forces, military involvement by the United States will likely also cause gold and silver prices to spike, as they are commonly seen as safe haven investments.

In summary, while the volatility of gold can be quite substantial, there’s no denying that our favorite yellow metal has been a strong performer after posting disappointing results in 2013.  We remain bullish on gold for the reasons noted above, and anticipate that we’ll continue to see upward movement in the months ahead.

Tony Davis
Tony Davis