Gold
– women love to wear it and investors love to see it soar in price. It truly is
a commodity that unites both genders. But it is also a metal that is quite
misunderstood. After all, the former chairman of the American Federal Reserve
Mr. Ben Bernanke once told Congress that no one really understood gold. In
today’s world, of course, there are analysts who have made an entire career out
of predicting where gold will go. But many times, gold investors come up short.
Their forecasts are often mismatched with where gold is going at a particular
period in time. For instance, forecasts from gold analysts showed fresh falls
after the crash of 2013 but what they saw instead was gold outperforming other
assets. So the million dollar question of the year might be: is gold a safe and
viable option for investors? There is no clear answer as to where gold will go
next. We don’t live in a utopia. Prices could soar one day and plummet the
next. Even analysts are often baffled by the direction of the precious metal,
which often results in inaccurate predictions. But even if investors don’t have
all the answers, they do possess the second best thing – the drivers of gold.
Let’s
look at gold today. There is no doubt the metal is under some serious scrutiny
in the midst of macro geopolitical events. The precious metal is not only a
shiny rock to be worn around your wrist or neck. On the contrary, it is rather
a reflection of broader, worldwide events. In short, when there is unrest gold
is seen as an insurance policy to have. And like any other insurance, the price
of gold is much higher at times when you really need it to be. If we look at
gold from a historical perspective, we will recall the famous peak of 1980 when
gold reached $850 per ounce following a Soviet Invasion of Afghanistan plus an
Iranian hostage crisis. Today, it would seem that not much has changed. Iran
has just been substituted for Iraq while Russia is still strongly influencing geopolitical
events. Earlier last week, the looming threat of a Ukrainian invasion and a
U.S. missile strike in Iraq lead to a surge in gold prices. Later on last week,
conditions cooled as Russian officials eased tensions in Ukraine. This week,
conditions aren’t looking quite as rosy. There is an eminent threat that Russia
might use its current ongoing humanitarian efforts in Ukraine to carry out a
military invasion. According to data compiled by Reuters, gold was seen climbing up above $1,310/oz. Spot gold was
also up 0.3% at $1,314.80 an ounce while U.S. gold futures for December
delivery were up $6.00 an ounce at $1,316.50.
This
is not news. We have been seeing the rough to-and-fro of gold for the better
part of July. While the availability of gold as a safe investment has proved
worthy of investors, what has not been as auspicious has been a strengthened US
Dollar, which has made buying gold relatively more expensive. Like many natural
resources and precious metals, the price of gold is typically quoted in US
Dollars. This accounts for a rigid bracket in which gold has stagnated within.
Gold is stuck between a range of $1,280 and $1,340 for the last month and a
half. According to many, this range is not going to change anytime soon.
“While gold may rise and fall with the ebb and flow of geopolitical news,
we’re still stuck in this range between $1,280 and $1,340, as we have been for
the last month and a half. Unless we see another major change, I don’t think
the current news is going to lead us to break out of that range,” said Mitsubishi
analyst Mr. Butler in an interview at Reuters.
There
are those who still remain skeptical about the direction of gold in the midst
of geopolitical tensions. Chief Market analyst at Interactive Brokers Mr.
Andrew Wilkinson, for instance, said in a recent interview to CNBC that: “gold
has failed to find the vigor typically associated with rising fear. At around
55-million ounces held by ETF managers in response to trading flows in
gold-backed funds, the total remains close to its lowest point of the year.” Views
will traditionally differ from analyst to analyst, however there is a list of
drivers that analysts can agree on when it comes to gold. We have already
discussed the significance of geopolitical events and the influence of the US
Dollar, however there is a number of other drivers. Primarily of which is oil.
Oil,
gold, and unrest are three entities that go hand-in-hand. Over the course of
the last century, much of the unrest has been innate within oil producing
nations, which has often accounted for radical prices. It is not unusual to see
a fluctuating oil price in relation to political unrest. Just last week, oil
prices surged following U.S. air strikes on Iraqi militants. But how does oil
connect to gold? It is simple. Gold is often associated with geopolitical
strife. Much of the strife comes from the world’s crude oil sources. Gold and
oil seem to move in tandem when compared to gold and the stock market or
interest rates. “Gold’s recovery from 30-year lows at the start of this century
also coincided with a long bull market in crude oil and other natural
resources. But while this ‘commodity super-cycle’ pulled in new money from fund
managers in a way the gold market was long used to, it turned sharply lower
when the financial crisis hit, driving crude oil 80% lower in the last six
months of 2008. Gold, in contrast, found its floor much sooner before
continuing its bull market, taking its gains over the 10 years to July 2014 to
235% against 140% for crude oil,” said Mr. Adrian Ash of the Telegraph UK.
Demand
is also another prominent factor in our gold story. Specifically Asian demand.
In 2013, Chinese households became the world’s largest buyers of gold. India,
the former record holder, was importing record quantities as prices crashed to
three-year lows in the spring of 2013. Prices plummeted when the government of
India shut down legal imports in mid-summer. Once again, investors have to keep
in mind that gold is not so much a shopping product. This is to say that gold prices
aren’t driven too much from people just merely buying gold because it is gold.
Instead prices shift when consumers purchase gold given the opportune price and
time.
Disclaimer: This article was posted with the permission
of a third-party contributor and the opinions contained therein do not
necessarily reflect those of Smallcappower. Smallcappower does not endorse
any investment advice provided by these third-party contributors.
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