NEW YORK (MainStreet) — Known as a safe haven asset, gold is losing its luster.
Last year, gold prices fell 28% as stocks soared, and while the commodity is up 7% year-to-date, analyst cite factors that point to lower gold prices going forward. Contracts for June delivery on the New York Mercantile Exchange stand at $1,296.30 per ounce. Prices have edged slightly higher over the past few weeks on the heels of tensions between Ukraine and Russia.
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"I think the Ukraine situation won't cause any further rally in gold prices," said Michael Seery, president of Seery Futures, a commodity consulting firm in Chicago. "If investors were worried, you would see stocks down, which is not the case."
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Aside from geopolitical factors, the Federal Reserve's scale back of its bond stimulus program, known as tapering, remains a potential threat to gold prices. As the Fed exits the economy, yields on 10-year Treasury bonds will rise, making investments in gold less attractive. Since December, the Fed has decreased its bond purchases by $10 billion per month, which is likely to continue until October.
"While gold has rallied this year, it's still down compared to last year, and it's going to take an exogenous event to move prices," said Paul Sacks, principal gold trader at Aurum Options Strategies. "There are plenty of forces pointing to lower gold prices, but a lot of things can change that, such as an unexpected hike in interest rates or a failure for the economic recovery to materialize."
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However, the Fed remains coy on when it will raise short-term interest rates, known as the Fed funds rate, though investors suspect this will come in about one year, as Federal Reserve Chairwoman Janet Yellen indicated during the March FOMC meeting. Once the Fed funds rate rises, the bears will take control of gold prices.
Some investors flock to gold as insurance, to hedge against other riskier investments in their portfolio. During the 2008 financial crisis, investors panicked and sold stocks sending the major indices to an all-time low in March 2009. Theoretically, gold prices should have edged higher, but in fact, prices dropped during the recession.
"This shows gold isn't a 100% guaranteed insurance policy," Seery said. "With stocks also dropping during that time, it makes me nervous to see investors who lost on both ends."
As gold starts to edge lower as investors discount the situation in Ukraine and demand continues to soften, gold may become cheap enough to attract more investors. "Prices could head lower for gold bars, so the lower it gets the more interest there will be."
For investors, a well-diversified portfolio with exposure to gold has proved to be a winning addition to the portfolio. But for the rest of the year, the playbook for gold remains lackluster.
- Written by Scott Gamm for MainStreet. Gamm is author of MORE MONEY, PLEASE.