Here are some of the interlinked factors that affect gold prices:
THE STATE OF THE U.S. ECONOMY
If our economy slows, it can negatively affect the economies of other countries, and also commodity prices including gold bullion. But if a U.S. slowdown is accompanied by a federal stimulus plan, gold prices may increase. If the economy picks up and strengthens, gold prices can decrease.
FISCAL 2013, THE DEBT-CEILING, SPENDING CUTS, GOLD PRICE
The inability and unwillingness of the Fed to address the financial crisis fully is bearish for the U.S. Dollar and has short-term implications for gold. Gold should outperform both as real money and as a safe haven.
U.S. STOCK MARKET FEAR & CONFIDENCE
Gold analyst Jim Sinclair has famously portrayed gold as the ‘barometer of fear and confidence’, and a form of insurance. Under normal conditions, as the stock market becomes increasingly risk-averse (fear), gold gets a boost. When market traders are buoyant and optimistic (confidence), gold-selling can cause the gold price to dip. Note however that there have been one or two largely unexplained exceptions to this phenomenon.
FEDERAL MONETARY POLICY AND GOLD PRICE
‘Quantitative Easing’, an unconventional monetary policy used by central banks, seems to correlate with the price of gold. The more QE there is, the higher the price of gold rises. There is definitely a positive relationship between the gold price and the U.S. Dollar money base.
A FEDERAL CREDIT-RATING DOWNGRADE
A further downgrade of the credit-rating, characterized in early January 2013 on Fox News by Steve Forbes of Forbes Magazine as ‘inevitable’, is likely to raise the price of gold.
MAJOR GLOBAL CURRENCIES AND GOLD PRICE
The U.S. Dollar is a benchmark for trading against other currencies. Other major world currencies include the European Euro, Japanese Yen, British Pound, Swiss Franc, Canadian Dollar, Australian Dollar, New Zealand Dollar and South African Rand. As these currencies start to appreciate against the U.S. Dollar, gold prices tend to rise and vice-versa.
CENTRAL BANK BUYING & SELLING OF GOLD
Significant purchases or sales of gold by global central banks, or by a signatory of the Central Bank European Gold Agreement, affect the gold price. More and more nation’s central banks are accumulating gold.
EUROPEAN DEBT & FINANCIAL CRISIS
Should the European debt crisis worsen, or a circumstance evolve that threatens the stability of the Eurozone, the gold price would be affected.
CHINA & INDIA GOLD IMPORTS
China and India are two of the leading gold importers. Such emerging nations are more likely to view gold holdings as financial security. Volatility with their respective currencies or economies could therefore affect the gold price.
CHINA SELLING U.S. TREASURIES
If China sells U.S. Treasuries persistently, then this will be an indication of the deterioration of the U.S. Dollar as a credible global monetary instrument.
MARKET INTERVENTION BY CHICAGO MERCANTILE EXCHANGE (CME)
If the CME lowers margins on silver and gold contracts, gold prices can rise. If it raises margins, gold prices can decrease.
INDIA’S DIWALI WEEK
The five-day Diwali Festival in mid-November is traditionally the time when Indians en masse buy gold jewelry, coins and bullion, with as much as 6,500 kilos sold in one day. This is an annual ritual that is considered by many Indians to bring good luck.
OIL PRICE AND GOLD PRICE
Although the price of oil is a measure of uncertainty and stability, fluctuations in the price of oil do not always affect the gold price in a direct way. If there is civil unrest in a Middle Eastern oil-producing nation and this affects oil production, global oil markets and global financial markets will be affected and there will be upward pressure on gold prices.
INTERNATIONAL CALAMITIES, NATURAL DISASTERS, TERRORIST ATTACKS, ETC
In general, such events do not affect the price of gold until ramifications from them seep into global financial markets. Some people thing that gold prices move on ‘emotion’ alone, but in reality, that is seldom the case.
There is one certainty in an uncertain world. If you own an ounce of gold at the start of global turmoil and market disruption, you will still own an ounce of gold once the dust settles. Value is in the mind of the beholder and physical pure gold has never been anything but valuable.