Gold had an excellent run last year, reaching an all-time high of ~$1,900/oz but had lost some of its luster later, though it still closed the year up, for the eleventh year in a row.
As the economic recovery in the U.S. appeared to be gaining traction and hopes for further stimulus faded, gold has not done so well this year though, it is still up about 5% year-to-date.
Though shorter-term outlook for gold is somewhat cloudy, the long-term outlook remains positive. Apart from the loose monetary policies and heightened macroeconomic uncertainty in many parts of the world, there are three main factors that will support gold prices.
The demand from India and China is expected to grow as the middle class in these countries prefer gold as a store of value. The consumers in these two countries account for about 40% of annual global gold consumption. Expanding middle class in these countries and their growing spending power will continue to generate a significant proportion of gold's worldwide consumer demand.
Purchases by central banks, in particular from the emerging countries, have soared in recent years and this trend is expected to continue. Lack of other "safe" investment alternatives increases the appeal of gold for the official reserves managers.
Lastly, though gold prices have been going up in the past decade, global mine production has not increased much during the same period and is also likely to stay stagnant in the coming years.
Given the above reasons and its diversification potential, gold should be a small part (5% to 10%) of any investment portfolio, but I do not believe that it is the best investment. In my view stocks, if picked carefully, are the best investment for the long-run.
Do you think that gold is the best long-term investment?
Neena Mishra
Zacks Equity Research
