What does the future hold for gold?

The U.S. dollar may be an obstacle to gold prices in the medium term.

Gold was on a tear last year. After a long, gradual upswing, the price of bullion suddenly gathered steam to hit new records toward the end of 2009. What lies ahead for gold prices?

That’s a critical question for investors hoping to profit from gold and gold-related investments, particularly after prices eased from the US$1,227.50-per-ounce high reached in December.

The good news, according to TD Economics, is that the gold rally may still have some upside in the first half of this year. However, gold could come under pressure after mid-2010, as some of the factors underlying bullion’s rally turn less supportive.

What’s behind gold’s rise

The long rally, which began in 2001, has largely been orderly, although the price acceleration toward the end of last year raised concerns that prices were ahead of themselves. Here are some of the factors that have been supporting gold:

• A weakening U.S. dollar, heightening gold’s appeal as an alternative store of value.
• The emergence of gold exchange-traded funds (ETFs) that have increased investor interest and demand for bullion.
• Renewed buying of gold by central banks in countries such as India and Russia.
• Concerns that global inflation will take hold.
• Appetite for “safe haven” investments in times of financial market turbulence.

While bullion may have some room for near-term advancement, TD Economics believes it will face increasing headwinds in 2010 and 2011.

A slowdown in the gold price

Just as the U.S. dollar has been a key driver of bullion’s upward moves, it is likely to be a significant obstacle over the medium term. The greenback’s woes are likely to ease as the U.S. economy outperforms other industrialized countries and U.S. interest rates begin to rise. Inflation worries are also likely to subside in the medium term.

All of this could leave gold in the US$800 range by the end of 2011. Over the longer term, bullion could revert to its traditional role of delivering poor returns relative to other asset classes. In stable financial conditions, demand for gold is likely to fade in favour of assets with higher potential returns, such as equities. TD Economics believes this will likely drive gold toward its long-term inflation-adjusted average of US$500 to US$600.

Given gold’s history of multi-year up and down cycles, this should come as no surprise. Periods of significant demand have been followed by sudden and sharp reversals.

Typically, only those who successfully take advantage of gold’s volatility generate large profits. But that kind of market timing is difficult for most investors to get right.

Gold and your portfolio

Gold bullion can play many roles in your portfolio. It is likely to appeal to long-term investors who see gold as a traditional store of value, as opposed to currencies, which can lose their purchasing power. It can also be used to hedge against inflation, as gold prices tend to rise when inflation does. Gold may also be a choice for investors who believe the U.S. dollar will fall, as gold and the greenback typically move in opposite directions.

Whether you choose to invest directly in gold bullion, in shares of gold mining companies or in gold exchange-traded funds, there are many ways to take part in gold. Gold stocks and gold-stock ETFs may provide better returns than gold bullion over time.

Another option is to invest in mutual funds that specialize in gold and other precious metals investments.

Use WebBroker’s Markets & Research site to seek out gold-related investments that might be suitable for your portfolio (see “How to research market sectors in WebBroker*”). Or call an Investment Representative at 1-800-465-5463 or a TD FundSmart* Mutual Fund Specialist at 1-800-461-3863 for more information.

 

* Trade-mark of The Toronto-Dominion Bank, used under license.

Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the prospectus, which contains detailed investment information, before investing. Mutual funds are not guaranteed or insured, their values change frequently, and past performance may not be repeated.

In this issue		April 2010
	Global economy gaining traction, but risks remain		What’s in store for the Canadian housing market?
	What does the future hold for gold?		TD Waterhouse presents MoneyTalk and book review
	How to research market sectors in WebBroker		Our enhanced retirement site is designed for you
	Invest for principle and profit — the socially responsible way