Gold is usually considered by investors according to its three functions – as a direct investment (in order to benefit from the increase of its price), as a hedge (insurance in case of decrease of another asset’s value) and as a safe haven commodity (insurance in case of catastrophe). And the last function tends to be the most popular incentive for investors to invest their money in gold, which is explained by the unstable political and economic situation in the world.
Figures first: according to the New York Stock Exchange Comex, June futures for gold fell 0.6% – to $1,280 per troy ounce.
I will provide you with an example of the formation and fluctuations of gold prices by describing the development of the world’s situation and its impact on the value of the precious metal.
April of 2018. The tense situation in the Middle East intensified after reports surfaced that on the night of April 8, a chemical attack was conducted in East Ghouta, Syria. Washington accused the government of Syria of using illegal weapons. Donald Trump said that Washington is ready to use missiles against Syria. Nevertheless, on April 12, Trump softened the rhetoric, noting that a missile attack on Syria could be inflicted “very soon or not at all”.
The surge in gold prices on April 11 is entirely related to the uncertainty that arose because of the conflict in Syria. As soon as the tension began to subside, the quotes returned to the traditional range.
Another weighty reason for the growth of quotations for gold is also the concerns of investors regarding the trade conflict between the US and China, which despite the agreement on May 20 to suspend the trade war, again gained momentum on June 15 after the United States imposed of trade tariffs on the imported goods from China inclusively.
On the other hand, the decrease in demand for gold is also affected by the April 12 US Federal Reserve publication of the protocol of the March meeting devoted to monetary policy, which predicts the acceleration of the growth rate of the US economy in the next few years and the achievement of the annual inflation rate at 2.0% (as of June 2018, inflation rate in the US is 2.8% – the highest inflation rate since February of 2012). Investors regarded the Federal Reserve’s statements as a signal for further tightening of monetary policy. As a result, the US dollar strengthened against the euro by 0.4% – to $1.16 per euro. There is a correlation between the decline in the value of gold and the strengthening of the US dollar: the price of the precious metal is denominated in US currency, so usually these two assets move in inverse correlation, which explains the recent fall in the value of gold.
Nevertheless, the situation in Syria will remain the main factor in determining the price of gold in the short term. According to analysts’ forecast, the cost of precious metals in the short term will be kept in the range of $1,270-$1,340 per troy ounce. However, any aggravation of the conflict in the Middle East will immediately raise the price of gold to around $1,400.
If you analyze the entire market of precious metals, it looks less balanced, despite the instability in the first quarter of this year. Today palladium is in an uptrend: in 2017, its price rose by 67% – to $1,124 per troy ounce. Platinum went up by 13.3% – to $1,020 and silver fluctuated in the range of $15.50-$18.50.
Generally price trends for other precious metals are different from gold. Although they depend on the US dollar exchange rate, the greatest influence on them is due to global economic growth, which is explained by their significant industrial use. Therefore, when inverting into precious metals, it is also necessary to monitor global macroeconomic indicators.