The price of gold increased very rapidly in the last few years. Many bullion traders bet that gold will continue to rise in the years to follow and thus maintain their long position. In light of the recent developments in the precious metals markets let’s examine what are the main factors that are affecting the prices of gold. Further what could induce gold prices to resume their upward trend of the past few years?
I think if we were to ask each bullion trader, he or she will have a different list of factors he or she considers affecting gold price. So of course there are many factors to consider and no one list will be complete or agreed by all traders. Therefore this list is based on my own impressions and opinions and should be taken with a grain of salt.
Further, keep in mind that the markets aren’t constant; the perspective and circumstances fluctuate so there could be a situation in which a certain factor used to affect gold price in a certain way and now the relation is different. E.g. during the collapse of 2008 and even more recently during the downgrade of U.S rating back in August 2011, the prices of gold rose and the yields of U.S long term bonds declined. This was because many traders were becoming more risk averse and thus put their money in U.S LT bonds and gold. This sentiment seems to have shifted during 2012. As the market becomes more risk averse and LT yields decline, the price of gold doesn’t go up, as if the relation between rise aversion and gold reversed or perhaps just broke off. Perhaps the high gold price made gold less of an investment for risk aversion traders than it once was.
Now that we got that out of the way, let’s see the main factors that are affecting the price of gold. The list isn’t in a particular order:
- Major Currencies: Euro/USD, Canadian dollar, Australian dollar. I have shown in the past that there is a strong relation between the so called risk currencies and gold; as Euro, Aussie dollar and Canadian dollar tend to appreciate against the USD, gold price tends to rise and vice versa. The chart below shows the linear correlation between Euro/USD and gold price during 2012.
- The FOMC monetary decisions; the monetary expansion QE1 and QE2 might have been among the key factors in pulling the price of gold up. Many wanted to keep the value of their dollar and invested in gold. People thought the value of the dollar will crash due to these stimulus plans but that wasn’t the case (up to now) at least against other currencies. Nonetheless there is a positive relation between the U.S money base and gold price and if the Fed will announce of QE3 this could pull gold price (at least for the short term) up;
- The changes in the CME restrictions;during September 2011 the CME decided to raise margins on gold and silver contracts; the market’s reaction was very quick and bullion rates tumbled down. This is a type of market intervention. If the CME will raise margins due to another heat up in precious metals market, then prices are likely to tumble down;
- The developments in India and China; these two are the leading countries in importing gold. Therefore the changes in these countries’ respective currencies (mainly Indian Rupee) and the economic developments are factors that could affect the prices of gold;
- European Debt Crisis: The turmoil in Europe with respect to the economic slowdown and debt crisis raised the yields of many EU countries’ bonds and also adversely affected the Euro. The risk factor attributed to investing in Europe seems to be negatively correlated with gold. This might be due to the relation between Euro and gold or perhaps because many struggling banks with liquidity problems traded their gold for cash to stay afloat; in any case if the EU debt crisis will further escalate it may further pull down gold price;
- The progress of the U.S economy; The U.S economy is also a leading consumer of gold but more importantly if the U.S economy slows down, it may adversely affect other economies and commodities rates including bullion. On the other hand, if the U.S economy will slowdown and the FOMC would consider another stimulus plan this could rally gold prices. Therefore there are two opposite forces that affect gold prices with respect to the progress of the U.S economy.
What do you think? Do you have a list of your own when you consider the changes in gold prices? You are welcome to share and voice your opinion.
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Tags: Gold price analysiswhat affect gold?
he last 10 years were clearly divided into two phases in terms of the price dynamics in the gold (GLD) market: the growth until 2012-2013 was followed by the decline.
The dynamics of change in the global gold supply and demand balance can also be broken into two similar phases: the deficit until 2013 followed by surplus.
So, what did so strongly affect the global demand and the gold price dynamics, and how long will this process last?
I'm skeptical about the thesis that in the long run gold will serves as a protective asset. Firstly, the correlation analysis does not confirm it. Secondly, analyzing the gold price chart and S&P500, we do not find any significant dependencies: starting from 2010, the American stock market has been growing with the same average speed both before and after 2012. So, in my opinion, it is wrong to argue that the global risk revaluation reversed the gold price trend starting from 2012.
However, the long-term dynamics of the dollar and gold prices demonstrate a very strong interdependence. At least, the gold price peak in 2012 almost coincided with the minimum price of the dollar:
As for the gold price and 10-Year Treasury Yield, they demonstrate a similar stable and long-term dependence. The gold price peak in 2012 also coincided with the minimum yield in 2012.
Let's go back to the original question: what changes in 2012 did reverse the trends of gold and dollar, and signaled the bottom of the 10-Year Treasury Yield?
In my opinion, the key cause of these phenomenon was the reversed course of the monetary policies, followed by the key global economies.
In 2012, the FRS of the United States launched the third and final program of the quantitative easing. By that time, the interest rate was already virtually at zero point, and the first predictions on when the FRS would start to increase it began to appear. Starting from 2013, Japan began its QE, and the weakening of the Yen was the first catalyst for the growth of the dollar. The Great Britain also started to increase its QE. When in 2015 the EU launched its QE, the strengthening of the dollar increased its rate. Note that as of today, only the United States out of the listed countries has already taken the first steps to tighten its monetary policy. At a minimum, this means that the dollar is predisposed to go up relative to the other key currencies of the world, no matter what Mr.Trump thinks of it. Additional risks associated with the future of the EU and the Euro increase the interest in the dollar even more. In such circumstances, the dollar, as the world reserve currency, is becoming increasingly attractive for savings, in comparison with gold.
Gold does not imply dividends or interest yield. For this reason, amid the rising interest rates, it becomes simply unprofitable to own gold. Moreover, the rising interest rates are inevitable amid the tightening monetary policy. We already witness this process in the dynamics of the 10-Year Treasury Yield. Inflation will be an additional catalyst for the growth of the rates.
I previously wrote, what might the current historically low velocity of money in United States lead to amid historically high monetary base. I suggest you read on this topic, it is really interesting.
Against this backdrop, I seriously believe that by the end of this year, 10-Year Treasure Yield in the United States can grow from 2.5% to 3.5% and even higher, which almost mathematically means lower gold prices.
As you can see, all the processes, playing a key role in the formation of the long-term gold price dynamics, are now tied to the pace of the monetary policy tightening in the United States. And, judging by the market expectations, this process will end neither this year nor even the next.
Let me emphasize that I do not predict the collapse of the gold prices this afternoon. But, once it became clear at the end of 2012 - beginning of 2013, that the easing of the U.S. monetary policy reached its limit, gold lost its the main driver for the long-term growth. In an environment where the dollar and the rates are likely to grow in the future, one should probably expect a decline in the demand for gold, as well as the continued decrease in its price.
I don't have a trade position in any stocks or commodities mentioned. And I believe that to be an advantage in terms of analysis, because I am able to consider indicators impartially, without subliminal motivation to see positive or negative sides, even if they don't exist.
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Tagged:Macro View, Gold & Precious Metals
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