Prices of gold have been the most mysterious among all kind of investment vehicle. Former Federal Reserve Chairman Ben Bernanke, holding economic degrees from both Harvest College and Massachusetts Institute of Technology famously told Congress that, “nobody really understands gold prices, and I don’t pretend to really understand them either.”
Nonetheless, there are a lot of investors still see gold as priceless piece of investment. The main reason is that it was often seen as safe haven during time of uncertainty. Therefore, it is nevertheless vital to understanding certain major factors that move gold prices.
Gold Price Movement
The law of supply and demand principle of the physical gold, as commodity affects gold prices is undeniably the most fundamental reason why gold prices are moving substantially. The greatest physical gold market demands come from India and China.
Since there were limited supply of gold around the globe, prices have reflected this reality. This can easily explain why gold prices have never returned to its historical prices. Gold mining professional field also projected a decline in the mining supply in the years to come (see Chart A).
However, this does not guarantee gold prices will surge continuously in the near future. In short term, there will still be up’s and down’s in its market pricing. Because there are other factors intertwine.
Second factor affects prices of gold is the value of US dollars. A noticeable observation discovered an inverse relationship between the two. Whenever US dollar rises, gold price drops and vice versa (See Chart B). This is possibly due to the capital movement of market players who were swinging their funds in between these two investment instruments. They move their capital to the side which they see the most value for any opportune time.
The third factor is equity market crisis. Whenever there is a global crisis such as wars, recession, global epidemic breakout, etc., equity markets are often rattled, and gold prices shot up in panic buying as a safe haven to park investors’ fund. Therefore equity market direction is another important factor to watch for gold investor.
The last factor, but not the least, is the inflation. Whenever inflation rises, value of purchasing power decreases. Paper money losses its holding value for their owners. People then choose to hedge against the drop of paper money value by buying into gold and dump the paper asset. When people buy into gold for hedging or storage, the demand will push up gold prices.
Recent Gold Prices Hike
Gold prices hit its recent bottom at August 16th 2018. Its price has risen on a roller coaster trip since after then. The most beautiful price surge was the recent two months straight (see Chart C). According to Fundsupermart.com.my, the two gold related funds landed top two most performing funds for one-month category. I have also switched over a little capital over there a month ago for a trial and these funds are enjoying such return temporary (Chart D).
However, no one can be sure whether this surge will continue or just momentary. Will it reverse its course later on? This will have to be answered with a number of possibilities.
Recent gold price rises for the past two months might possibility due to the drop of the US equity market. Investors rushed their capital to buy gold seeking for safe haven. But equity market indexes have recovered since after Christmas, but why is it that gold price did not drop back (see Chart C)? It is because the US dollar value has dropped back which has compensated the lack of pushing pressure from equity market (see graph E). Therefore, there are a number of factors being at play in pushing up recent gold prices.
In order to determine whether gold price will continue to surge will have to observe a few factors, particularly on US dollars and equity market direction.
Future Gold Price Indications
For the US dollars that has recently turned soft is because the Fed has announced a flexible plan for rate hike in 2019 recently. Both analyst and investor see this comment as a slowdown in interest rate hike for 2019. However, no one knows how true will this slowdown be when we enter into 2019. What if inflation rate unexpectedly rises in 2019 because of the long term effect of tariff hike that Trump has implemented?
Second factor we need to consider is the equity market direction. There were a lot of voices crying the coming of the bear market when markets were crashing two months ago. But since after market indexes have recovered substantially after Christmas, bull market callings have returned their voices. If this bull really revitalizes, then gold price would probably reverse its course. If the recent recovery is merely a dead cat rebounding, equity market index would drop back even deeper into bearish territory. Then gold prices will have a chance to continue surging higher.
Nevertheless, there might be other factors such as those described above will influence gold’s future prices. These two factors, namely, US dollar value and equity market directions will definitely worth more our attention if we want to involve with gold related funds.
Invest safely and cautiously, capital protection should be your investment priority!
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The view and opinion expressed are personal views of the author and are subject to change based on market and other conditions. This write up does not constitute sole advice for investment decision. Investors are advised to do further reading and research to conclude individual decision.