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Investing in Gold: Analyzing Short-Term and Long-Term Outlooks

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Fed overhang

The uncertainty related to the Fed’s rate hike decision still remains quite high. This is the single most important factor driving gold prices right now. There are some encouraging signs in retail demand in the US and US gross domestic product (or GDP) being revised upward for 2Q15.

However, risks related to the rest of the world, especially China, could negatively impact the US economy’s outlook. For example, the China Caixin flash manufacturing PMI slipped to 47.1 in September, which is below expectations and is at the lowest level since March 2009. The global concerns have reduced the chances of Fed hiking rates at its October meeting, and a higher percentage of traders are expecting a rate hike in December 2015 or January 2016.

Until then, the market will focus on the data that will help Fed decide the timing and amount of the rate hike, inflation, and US labor market growth, as well as the growth concerns in the rest of the world.

The non-farm payroll report due on October 2 will get market attention. Until then, gold should trade in a narrow range with risks to the downside in the near to medium term.

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Long-term outlook remains negative

In the medium to long term, continued strength in the US dollar driven by diverging monetary policies, the difference in the outlook for the US economy versus the rest of the world, and weaker commodity currencies, should drive gold prices down. Eventually, an interest rate hike could lead to portfolio reallocation to interest-yielding assets, which would also negatively weigh on gold prices.

Current low inflation environment globally is also not in gold’s favor, which is considered to be a hedge against inflation. In turn, this would be negative for gold prices (GLD) and gold stocks like Newmont Mining (NEM), Kinross Gold (KGC), and Yamana Gold (AUY). It also affects ETFs such as the VanEck Vectors Gold Miners ETF (GDX) that invest in these stocks. These three stocks account for 12% of GDX’s holdings.

Meanwhile, physical gold buying in the second half of the year in India and China could support gold prices somewhat.

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