In order to invest successfully in gold we need to understand the fundamentals that push gold to rally. There is always a trigger that brings change in the gold market. For now, the technical trigger for gold is the stock market. Gold buyers look at Fed Rate cuts tend to drive the bull market up. With that said, let us look at some fundamental things that have an impact on gold.
In the 70s, there were a number of geopolitical events that could have influenced the price of gold that we see today. Geopolitical tensions of the 70s affected the oil prices which in turn affected inflation. When an event has is immediate and sustained and has an effect on energy prices it is generally ignored.
#2. Central Bank Buying
Every country in the world has a central bank. The role of the central bank is to manage the economy of a particular country by making sure that the inflation is low and money flows in and out of the country legally. Central banks are also gold repositories. They buy and store gold in vaults as a way to hedge money so that the country can still weather economic upheavals. In the last couple of months Central Banks have been buying gold at a higher rate. So, what do central banks know that the rest of us don’t know? Do central banks have insider knowledge that is pushing them to buy all this gold? The truth is, even if central banks had had information that the rest of us don’t know anything about they cannot use the information for marketing. At the rate that central banks are buying gold, we can only assume that they are gearing up for tough times.
#3. Demand vs. Supply
Gold is a different kind of commodity. Its price is driven by factors such as inflation, the US Dollar strength or weakness and interest rates. Like most commodities it is tricky because it does not respond to supply and demand when it should but that is not always the case. For instance, between 1980 and 1990 the demand for gold surged, however the price trended lower than expected.
Instead of being consumed like other commodities, the supply of gold keeps growing. It is not only the gold that is extracted in the mines, but gold that makes its way back when it is sold to be recycled or refined. This is one of the reason why even reaching peak gold will not affect the price of gold.
In the end the things that really affect the price of gold are inflation and interest rates. Investment demands mirrors the trends in the real in real life and impacts the price trend more than any other type of precious metal.
In the end, it’s ultimately inflation and interest rates that drive gold prices because they drive real interest rates. Investment demand usually mirrors the trend in real interest rates and it impacts the price trend more than any other form of demand.