It is often said that gold is a safe haven in stormy economic times. Some of the biggest gold prices surges in history have occurred in the wake of political crises and economic-political instability, thanks to the enduring stability of one of the most traded commodities on the planet.
While gold yields tend to be low in the best of times, stormy waters have the effect of greatly boosting the value of gold, ensuring that those already holding it enjoy reliable returns.
While we haven’t seen a major gold surge in a while now thanks in part to the booming US economy and the refusal of bodies such as the Federal Reserve and the European Central Bank to countenance interest rate changes, that could all change in the near future.
Here are the top four factors to watch out for, which could all move the price of gold skywards in the future.
If you’re a trader examining the latest price shifts in gold, looking back over time will show that the biggest surges occur when geopolitical crises happen. Countries going to war with one another or government shutdowns frequently push up the price of gold. In the next couple of years, the potential for global instability is significant. America’s trade war with China and the ongoing Brexit crisis in the UK both have a huge potential to cause investors to flock to gold in the near future. This will happen if capital does not feel comfortable in risk assets like stocks and commodities, but in safe havens like gold and the Yen.
A Weakening Dollar
The US dollar and the price of gold have an inverse relationship. Since gold is valued in US dollars, a strong dollar has the tendency to push down the price of gold. While the dollar has recently enjoyed some of its strongest gains in recent history, there is every reason to believe that is will decline in the near future. Morgan Stanley has repeatedly predicted that the dollar will depreciate significantly in 2020, given that they consider it currently “grossly overvalued”.
Major bubble bursts, especially if they come with inflationary bursts, always have a huge positive impact on the value of gold. When looking back at the history of major financial crashes, we can see that the 1976-1980 inflationary burst resulted in the first gold peak. In the period 2004-2011 in which the global financial crisis, also known as the Great Recession, took place there was a strongly rising inflationary trend which burst in 2011. It pushed the price of gold up to an all-time high of $1896, as investors flocked to safety. Back in 2013, when recovery was in full swing, the price of gold had dropped down 35%.
One area that few people consider is how climate change affects the price of gold. Several studies have been conducted which show how climate change in traditionally colder areas has reduced the capacity of mining companies to mine for gold. Canadian gold mines, for example, are now submerged underwater for most of the year, making them difficult to get to. This has the effect of pushing up the price of gold since there is less available on the market. Expect this trend to accelerate in the future as climate change continues apace.
Whether you’re an investor or a trader, knowing what affects the price of gold is a fundamental skill. Remember to keep watching the news in the year ahead.
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