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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