Why I Won't Be Buying Gold Anytime Soon

Buying gold above $1300 doesn't make sense, says one active investor...

 

WHEN GOLD prices surged to over $1400 an ounce this month, I was still not a believer in its potential as a buying opportunity, wrote George Leong at Investment Contrarians last week.

 

Rather, I thought it was more a trade against the possibility of an expanded conflict arising in Syria.

 

The gold bugs were suggesting the time for buying gold was here again, and I even heard a target price of $1700 an ounce. Now, with the situation in Syria looking to be resolved, the safe haven's gains over the past few weeks are beginning to fade away as the price falls below $1400.

 

My feeling is that gold could move even lower and back towards $1300-1325 if the Federal Reserve decides to rein in its bond buying at this month's Federal Open Market Committee (FOMC) meeting. The numerous rounds of quantitative easing and lower interest rates drove down the value of the greenback and created an environment of easy money that helped to drive up the price of gold.

 

Now, with the Fed's bond tapering around the corner and bond yields set to edge higher, the US Dollar will likely get stronger. And since gold is priced in US Dollars, the cost to buy US-denominated gold will increase. The higher expected financing rates will also impact the carrying cost of buying the yellow metal, so I also expect demand to fall, which will help to drive down prices.

 

In the absence of a strike in Syria, I'm calling for gold prices to decline as we move forward.

 

The futures market is predicting gold will stay in the $1300 range until mid-2015 and prices to break above $1400 by the end of 2015, eventually moving to the $1500 level by June 2019. That's nearly six years from now, and with a cumulative 15% upside based on the futures market, I really don't think I'd be buying and hoping for a big surge.

 

 

My thought is that prices will likely hold at the $1200-$1300 level and may spike on any negative news that causes investors to flee to safety; otherwise, I feel the upside is limited for the time being.

 

With this in mind, the mining sector could continue to face cost issues and the reluctance to explore and develop properties unless there is evidence that gold prices are heading higher and staying there. Based on the futures market, I wouldn't be that anxious to run and start buying gold.