A question we are very often asked is ‘Are gold prices going to go up or down?’.
Well, the answer to that is we don’t know. We wish we had a crystal ball and could see into the future of ever-fluctuating gold prices. However, there are a few factors we can look to that can give us an idea into the direction that gold may be taking.
Global Events & Uncertainty
World events often have an impact on gold. Gold prices tend to rise during political chaos, as people lack confidence in governments and fear their banks may fail. Gold is seen as a safe haven amid economic crisis, as people become uncertain about the future stability of their economy and seek financial safety in gold, and prices rise.
Over the past several weeks we have seen the price of gold rocket to its highest ever. The price has risen along with increasing uncertainty due to the global coronavirus pandemic which is greatly affecting global markets and the economy.
With the gold price (in GBP) at record highs, and the virus pandemic being an unprecedented phenomenon the like of which unseen, it is difficult to look to the past to see any patterns that may show us an idea of what may be to come for gold. However, we can look to other catastrophic events such as WWI and WWII and how the markets reacted to those, we may be able to get a faint idea.
I am sure we have mentioned the word ‘uncertainty’ in our blogs before, and once again it will be that driving force which will most probably push the price of gold. Whenever there is uncertainty in the market, the price reacts to the instability in the economies around the world. In this case in particular: claims that the UK may soon see the largest economic contraction in over a century due to COVID-19, as well as the possibility of inflation rearing its head (see last week’s blog), things seem as uncertain as they can possibly be right now.
Interest Rates & Stock Markets
Gold may not pay interest like a savings account, but current gold prices can reflect increases and declines in interest rates. An increase in interest rates tends to cause gold prices to fall. As interest rates increase, investors may sell their gold to free up funds to shift into other investments causing the price of gold to fall. As interest rates decrease, gold prices may increase again.
As with interest rates, gold moves in the opposite direction to the stock markets. Gold is seen as a haven for investors during uncertain times, so when the expected return on stocks fall, the interest in gold investment is increased, driving up the price. Investors tend to move towards stocks when the market is booming, leaving gold, which then drives prices down.
Supply and Demand
Supply and demand play a major role in determining the price of gold. This precious metal has been coveted all over the world for thousands of years and is likely to remain that way. The supply of gold in the world remains stable due to the physical limitations of mining for gold, however, the demand that is generated by industry, government reserves, and the jewellery trade means that this has a large impact on gold prices. As the world demands more gold, so the price increases.
Most recently, as the COVID-19 pandemic took hold, the gold market saw panic buying in March due to economic uncertainties, as both new and experienced investors sought to protect themselves financially by buying gold. This saw shortages for many dealers and refineries, as investors clamoured to buy gold faster than it could be bought in. Travel restrictions and border shutdowns also impacted greatly on the movement of precious metals. All of this greatly impacted on the gold price, and we watched as the price surged to never seen before highs.
Looking to the Future
Any and all of the above factors can impact the price of gold. The main idea we find repeatedly, is that people tend to see gold as a safe haven in case of economic uncertainty. Uncertainty is the byword for the movement. Any uncertainty in world economics or world Geopolitical affairs and off gold goes! Investors put their faith in precious metals, seeking a ‘safe haven’.
It seems investors run to precious metals in the end and, it is hard to remember a time like this when there were so many reasons why the price of gold could be on its way up.
This blog represents one person’s opinion only. Customers should conduct their own research and take advice before making an investment. We do not offer investment advice.