Gold prices peaked at $1,920 per troy ounce in 2011 as investors fled to safe haven assets. However, over the past four years, gold prices have been steadily declining, reaching a 5-year low in July 2015 at $1,078. Gold prices have been hovering around this trough, giving investors little to be optimistic about.

Traditionally, gold has been viewed as a safe-haven investment. Unlike most assets, gold doesn’t pay interest or dividends and costs money to hold – its attractiveness lies primarily in that it is perceived to be a relatively stable and riskless asset. It is often used for portfolio diversification, as price tends to remain stable during periods of economic uncertainty. However, gold’s reputation as a safe-haven investment is being tarnished -its falling value over the past four years reflects a lack of confidence by investors and its inability to perform well under recent pressures.

Why have prices fallen?

Volatility

The ease of trading the asset virtually, in the financial markets rather than dealing with large quantities of the physical asset means gold prices are subject to volatile market swings. Now unable to protect a portfolio from volatility, the desire to hold an asset which otherwise has small and few pay-outs has reduced. As a result, demand for gold has declined over the past few years, along with its value.

The US Dollar

Gold is quoted and priced in dollars. It is intrinsically linked to the US economy and its currency; one of gold’s key feautures is that it acts as a hedge against the US Dollar. If the dollar is weak, gold is more affordable in other currencies, resulting in a rise in demand; this drives up prices and the value of gold. Unluckily for gold, the dollar has been on the rise for the past 18 months.

Chinese Economy

China is the world’s biggest consumer of commodities and a slowdown in the economy has led to falling demand. Gold is not the only commodity to have suffered. Crude oil, aluminium, platinum, copper and iron have all performed dismally.

Chinese gold reserves are also not as high as expected. In a recent announcement (the first since 2009), China revealed that gold reserves only make up 1.6% of its total Forex holdings- far lower than the average of 10% in developed countries. Gold advocates hoped confidence and credibility would be raised by China bulking up reserves. But, even China is losing its confidence in gold.

Grexit

Gold is often an attractive hedge against times of economic and political distress. Talk of a possible Eurozone breakup or news of a country beefing up their nuclear stockpile can send prices soaring, as gold performs well against other, riskier assets. Instead, a potential Grexit has been avoided due to the Eurozone’s deal on Greece and the nuclear deal with Iran has mitigated the risk of war. When times are good, gold is redundant as investors can afford to be more bullish with their investments.

This is also heightened by the fact that economic prosperity tends to bring higher interest rates, which have been at record lows since the financial crisis. Forecasts estimate interest rates in Europe and the US to rise by the end of this year, raising opportunity costs of holding gold.

Conclusions

The future for gold as a solid investment seems unclear. Inflation could help appreciate gold’s value once again, but forecasts are not promising in the developing world. Gold is no longer viewed as such a safe and riskless investment and in any case, investors aren’t looking for safe or riskless investments. Investors can find more ways of investing their money and for a higher return- until there is a great need to invest in a safe investment that is unaffected by political and economic turmoil, demand for gold is likely to remain low. For now, it looks like the prospects for gold are anything but golden.