In 2019, the age-old aphorism, ‘All that glitters’ certainly holds true for gold. For the year-to-date, the world’s most treasured safe-haven asset has appreciated from a steady level of $1300 per troy ounce in January to its current trading levels of over $1500. In percentage terms, this translates into a 15% appreciation, at a time where tremendous uncertainty has engulfed global equities markets.

Extrapolating further out, the move to gold is abundantly clear. Over the past 1 year, gold has gained approximately $300 per ounce, and over the past 3 years it reached a nadir of $1127 per ounce. Clearly, this precious metal is on the ascendancy thanks in no small part to the volatility in equities and currencies markets. Equally notable are futures markets prospects for this precious metal. The gold futures markets are bullish over the next 12 to 21 months, with pricing between $1560 per ounce through $1600 per ounce.

The long-term trends for gold bullion have clearly priced in the possibility of increased political tensions between global powers such as the U.S., Russia, North Korea and China, notwithstanding the trade relations between the US and China, the new trade pact between the US and Japan, and a possible new trade treaty between the US and the UK.

Both Russia and the US are engaging in sabre rattling, with Russia conducting ballistic missile testing (possibly nuclear missile testing) since the US withdrew from an accord with Russia that would limit nuclear proliferation. Gold takes its cues from investors, traders, and speculators. The geopolitical tensions are one component driving the overall demand for gold.

What Impacts Demand for Gold?

Commodity price trading focuses on the commodity price against a currency. By trading lots with buy or sell orders, clients can participate in trading deals with gold contracts. Derivatives markets allow profits to be generated regardless of the price movement of the commodity. Conventional wisdom states that gold profits are earned through appreciation of the underlying commodity’s price, but this is simply not true.

A myriad of factors comes into play when investors consider the prospects of gold. Foremost among them are monetary policy matters vis-a-vis the Fed. The Federal Reserve Bank has a big part to play in the drive to gold. The higher the interest rate the greater the opportunity cost of holding gold. In other words, there is more to be gained by investing your money in high interest-yielding investments than in gold which has a 0% return.

Truth be told, gold is largely considered a store of value with long-term growth prospects. When the Fed decides to cut interest rates, this helps traders and investors to shift their resources to appreciating investments (this is at least the perception) which often takes the form of gold, the Japanese yen, the Swiss franc, and other hedge-style commodities.

From a purely economic perspective, the general performance of the world’s biggest economies plays a big part in gold demand. For example, poor manufacturing data, slow GDP growth rates, and weak jobs reports can drive traders and investors away from stock markets to gold. When bearish reports are released, there is a tendency to pull money out of the Dow Jones Industrial Average, the New York Stock Exchange, the S&P 500 index, and other global markets and protect investment portfolios by investing in gold stocks, gold funds, and possibly even in physical stores of gold bullion. Gold does not generate any interest for those who hold it; it appreciates when economic sentiment sounds.

Gold prices tend to rise when weak economic data is released, and gold prices tend to fall when strong economic data drives investment in financial markets. Another important determinant of demand and pricing is gold usage. Whether it’s jewelry, electronics, or simple demand by reserve banks around the world, the demand for gold has a direct correlation on the price of gold. With falling supply and the increasing costs of extracting gold from mines, even a steady demand for gold will lead to a substantial rise in the price of this precious metal. For example, South Africa was once the world’s biggest gold producing nation. It now struggles to extract gold ore from its mines given rising costs, and problems with union workers, et al.

It is simply unproductive at current levels to extract gold from mines given the current gold price, but with enough momentum that could change. This takes the discussion to another important determinant of gold prices: the strength of the USD. Gold is a dollar-denominated commodity. In other words, it is priced in USD. When the USD strengthens relative to other currencies (evident through the DXY), it takes more per-unit foreign currency to buy the equivalent ounce of gold. This tends to dampen demand for gold. When the USD depreciates relative to other currencies, those currencies can buy more gold per unit currency than before. This increases the price of gold through its impact on gold demand.

Viewed in perspective the demand for gold and other precious metals is impacted by multiple interrelated and unrelated market forces. The notion that only appreciating assets are profitable has long since been debunked through CFD trading and Futures markets, with much to be gained from correctly anticipating price movements.

Brett Chatz

September 2, 2019