What is the price of gold and which way will it go?

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Economic and geopolitical uncertainty traditionally drives investors to reliable metal markets

Gold has long been referred to as a “safe haven” for investors during times of market volatility and high inflation. Since the financial crash of 2008, investors have flocked to the precious metal, making it one of the most reliable markets of the past decade.

Yet 2018 saw gold lose much of its shine. In August, gold prices fell below the psychologically important $1,200 per troy ounce mark for the first time in more than two and a half years. This represented its worst losing streak since 2013.

“Analysts pin most of the blame on the dollar,” said Quartz. Its unexpected strength “usurped the yellow metal as skittish investors’ preferred haven assets”, says the site, as well as making US-priced bullion more expensive for buyers with other currencies.

However, since its August nadir gold “has started to regain some of its lustre”, says CNN Businuess.

A host of looming political issues, including the US-China trade war, rising tensions in the Middle East, Brexit and fears of a slowing global economy have seen investors scurry to traditional safe-haven assets, pushing gold prices up.

Last month gold topped $1,400 an ounce, rising to a six-year high of $1,439 last week, representing a 12% increase in just two months as the precious metal experienced its longest stretch of weekly gains since 2011.

After a slight drop at the beginning of this week amid a resurgent dollar index, gold prices rallied again on Wednesday following testimony from US Federal Reserve chairman Jerome Powell, in which he said that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the economic outlook.

The Los Angeles Times says Powell’s remarks “allayed investors’ concerns that an unexpectedly strong US jobs report that came out Friday might give the Fed reason to stay put on interest rates”, with FX Empire saying he “all but confirmed that the Fed was planning to cut rates when they meet again in July”.

This saw the dollar drop and US yields move lower, with gold being the main beneficiary. With Powell set to testify in front of the Senate again today, as of 1.30pm on Thursday 11 July, gold prices were testing their 2019-highs at $1415.64.

“The Fed’s dovish stance is a departure from earlier in the year, when some investors thought that quantitative tightening would mean gold prices would be under pressure” says Live Mint. “But now with interest rates expected to be lowered, demand for gold is likely to increase. Bond yields and gold are, after all, inversely correlated. Falling bond yields make non-interest bearing investments such as gold relatively more attractive for investors, as the opportunity cost of holding gold becomes lower.”

David Song in Daily FX says “gold prices may continue to benefit from the current environment amid the threat of a policy error, and the price of bullion may exhibit a more bullish behaviour over the remainder of the year as market participants look for an alternative to fiat currencies”.

Why does the price of gold fluctuate?

As well as the usual law of supply and demand, risk aversion or appetite plays a central role in determining how the price of gold performs.

During economic booms investors opt for riskier stock with potentially much higher returns, yet in times of market volatility when currencies fluctuate gold appears a safer bet, with steady returns and low risk.

The gold price tumbled in late 2016 after Trump’s surprise election victory raised expectations that his policies would lead to inflation, higher interest rates, a stronger dollar and better returns from other investments.

Gold usually benefits during periods of ultra-low interest rates, as it offers a better alternative to bonds and savings accounts with poor returns.

Currency markets are another major driver of the gold price. Although gold is traded all over the globe, it is often denominated in dollars.

Geopolitical instability also plays a factor, with fears a war of words between the US and Iran could turn into a full-blown military conflict creating a noticeable bump in gold prices over the past month.

“Gold is not only bought as an investment,” says Gold Price, “but it is also bought for use in other areas such as industry and jewelry making”, meaning factors such as jewelry demand can also become factors.

Is it really a safe bet?

Gold’s reputation as a “safe haven” investment often makes it the benchmark with which other more volatile stocks are measured.

“With stocks and shares, currencies and property continuing to falter in an under-performing UK and wider economy, individuals are looking to diversify their investment portfolios and place their money into physical gold which has consistently outperformed all other forms of investment on the market,” says Bullionbypost.co.uk.

But not everyone is so sure. John Wasik, writing in Forbes, says the reasons for not seeing gold as a solid investment are pretty straightforward.

“Unlike a bond, the metal pays no interest. There is no dividend. It may not protect you against the worst forms of inflation, which are often in health care. And there is no implicit guarantee that it will appreciate in value,” he says.

Fear over the economic future also fuels numerous gold scams, with dealers and brokers pushing coins, bullion or stocks in mining companies, which provide them with commission but may not be in the best interest of the consumer.

How is the price of gold calculated and what is a karat?

On global markets gold is calculated in troy ounces (one troy ounce is equivalent to around 31.10 grams). Because an ounce of gold is the same whether it is in the US or in Japan, the spot gold price is theoretically the same everywhere in the world.

The purity of commercial gold is measured in karats.

According to some sources, the terms karat derives from Arabic and Greek words meaning “the fruit of the carob tree”. Remarkable for their consistency, the seeds of the fruit were reportedly used to balance the scales used by merchants at ancient bazaars.

Karats now refer to the ratio of gold found in a sample. Pure gold is 24 karats (k), so the percentage of gold in a piece is the number of karats out of 24.

10k gold is the most commonly found around the world, although different countries class legally permissible gold differently. In the UK, 9k is the minimum accepted for the metal to be legally classed as gold, rising to 10k in the US and 18k in France, Italy and Switzerland.

Tips when buying gold

The US Federal Trade Commission has a number of guidelines to follow when choosing to invest in gold:

  • When buying bullion coins or collectable coins ask for the ‘melt value’ – the basic intrinsic bullion value of a coin if it were melted and sold.
  • Always get an independent appraisal of the specific gold product you’re considering.
  • Consider additional costs such as insurance and safe deposit boxes which will cut into the investment potential.
  • When buying gold that is stored in a third-party security facility, take extra precautions to ensure that the metal exists, is of the quality described, and is properly insured.
What does the future hold?

The trajectory of gold’s recent rally has divided analysts.

Phil Streible, senior market strategist at RJO Futures, told Kitco News that prices for the yellow metal may still see much higher levels from here.

“We should continue to see that break through $1,400 and I anticipate that a lot of the short sellers will end up giving up at that level. So, no telling how high we can go from here, it’s kind of got that perfect storm going on with increasing geopolitical risks and then also a dovish Fed,” Streible said.

Paul Tudor Jones of Tudor Investment has said that once $1,400 an ounce is breached, the next level is $1,700, something Streible says that is definitely possible.

Yet “despite a number of positives for gold prices, some analysts remain cautious” says Live Mint.

“The sudden spike in gold prices is the result of speculative buying given the rise in global uncertainty,” said Cameron Alexander, director of precious metals research at GFMS, Refinitiv.

“We think that recent gold price surge seems overdone and high volatility for gold prices should not be welcomed by investors,” Eun-Young Lee, an analyst at DBS Bank said.

His average price forecast for the third quarter of 2019 now stands at $1,360/ounce.

For the optimism on gold and silver to play out, it is necessary that the US dollar doesn’t rally from here, said Ritesh Jain, a global macro investor.

Last week saw the US central bank leave its benchmark rate unchanged, “but its shift in sentiment was not left unnoticed by traders” reports the Daily Express. The bulk of Fed policymakers slashed their rate outlook for the rest of the year by roughly half a percentage point, and Fed Chairman Jerome Powell said others agree the case for lower rates is building.

“As things stand, markets believe that rate cuts are on the anvil sooner (July onwards) rather than later (September onwards)” says Live Mint.

Neil Wilson, chief analyst at Markets.com, told the Express: “Gold has now cleared a tonne of important multi-year resistance, paving the way for a return to $1,400 and beyond.

“This is a big move, but if the Fed doesn’t deliver the cuts the bulls could be caught out” he added.

What is the gold standard?

The gold standard is a monetary system whereby a country’s currency or paper money has its value directly linked to its gold reserves.

Once the de facto monetary system used by central banks around the world, it was slowly phased out over the past century.  Britain stopped using the gold standard in 1931 and the US followed suit in 1933, finally abandoning the remnants of the system in 1971.

The gold standard was completely replaced by “fiat money”, a term to describe currency that is used because of a government’s order, or fiat, that the currency must be accepted as a means of payment.

This allowed for the effective mass-printing of money that was not tied to a physical guarantor, allowing the extension of credit and the explosion in the global economy from the late 1970s.

 

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