And it’s here that it would do well to remember that gold is ‘old money’, and that’s exactly the way current gold prices are behaving. The biggest indicator for this is when its price action diverges from the price action of other economies. Which we’ve seen.
Gold is currently in a downward trend. Recent months saw stress in currency markets increase, and the price of gold fell drastically — scraping a one-day low of about US$1,160 an ounce.
But it appears the price of gold is about to be shook up, in the next three months and leading well into 2019 prices are set to rally against its current downturn trend.
But in order to forecast future gold prices its important know what influences it. There’s a lot of things happening beneath the surface that could prove very beneficial for the price of gold in upcoming months and well into 2019.
What influences the price of gold?
Of course there’s certain fundamentals which consistently show the direction at which prices of assets will more than likely move in the long-term.
For gold, the catalysts behind its price is a weaker US dollar and a limited gold supply.
The US dollar angle. If you don’t already know, the US dollar is the most important global benchmark for any currency, and this really just stems back to the fact the US economy is the strongest developed economy in the world.
Add the trump tax cuts which, coming into effect early this year, have seen official interest rates on the rise.
Another fundamental component is known as a ‘psychological component’. Moments of global uncertainty, such as the North Korean missile strikes and threats to impeach President Donald Trump, have seen the price of gold rise steeply. Why? Because it created widespread turmoil in the US economy, and gold feeds best on people’s fear. This was reflected in the volatile prices of gold in 2017.
Yet each of these events soon followed a lowering of gold’s price, as investors began to see and believe that things were going back to normal, and the fear soon dispensed.
Right now we are in a period of ‘no fear’, the S&P 500 is nearing all-time highs and US economic tensions are simmering below the surface. In fact gold is the cheapest it’s been compared to US stocks since 2007.
Now, despite currently trading in a downward trend, Greg Canavan and many other Money Morning contributors have projected that the price of gold could bounce back.
A good point of reference would be to look into the trump administration, and how political happenings can influence the price of gold.
How Trump is supporting gold prices
Why the price of gold could be helped by the trump administration is something we’ve already covered, here. But naturally it has something to do with interest rates and the economic health of the US — which I’ve touched on.
One thing to consider is the United States’ strained relation with China and the trade war that has consequently swept up the globe. There’s no shortage of mainstream media covering the topic, and in most cases Trump is depicted as a slightly deranged fool when it comes to the US’ economic health.
But Trump’s reasoning isn’t as unhinged as one might think.
To give you a quick overview: the Trump administration believes previous US governments effectively sold out the American manufacturing industry to China. How else does a country as previously unassuming as China become one of the biggest economic power houses? Since joining the World Trade Organisation (WTO) in 2001, China has sped up globalisation and US manufacturing power has basically shifted to China.
Whether you agree with this belief or not, if Trump is successful in levelling the playing field, it might mean some pain for US multinationals, and the stock market. Well, we don’t know when this will happen, but what we do know is that when this does happen, it could be good for gold prices.
That’s because trying to undo a decade’s worth of policies will bring about a lot of uncertainty. Just look at today’s share market, it was slammed overnight.
The low before the high
Political risk could be playing a major part for the positive future of gold. In fact, forecasts suggest that the mid-August low could be the low before the high. A high that could come in as little as three months and last well into 2019.
But of course, investors shouldn’t be jumping on gold stocks just yet…
It never pays to invest in anything unless you see a little bit of momentum first, that’s just forward thinking. But however you want to look at it, all commodities — including gold — are driven by supply and demand.
Think back to 1999–2012, where the gold market rallied in investment and mines sprung up everywhere, taking advantage of the high prices.
This of course led to oversupply, and this is most likely why we are seeing lower prices. Add five years of volatility from 2012–2017, and we have seen our fair share of gold producers unable to withstand.
But this also puts gold at just the right position to take off well into 2019 and beyond. All we have to do is wait, and see how the sovereign debt crisis plays out — granted you know when and what to buy.
Ryan Clarkson-Ledward, For Money Morning
PS: If you’re thinking now is the time to jump back into gold investments, you might want to hold off. Our resources expert Jason Stevenson is a bit bearish on this front, and he believes that gold prices still might tank before we see any signs of improvement. Read more in his free report: ‘Why You Should Wait to Buy Gold Stocks’