Investing in gold comes in fashion again - December 23, 2018
Gold is at an interesting place right now. Several economic and historical factors are pushing its price down, but we can already see some other events that can make it skyrocket in the near future. Several countries (and investors) are betting on this, too. We also remain bullish about precious metals, and now you can read why!
Real interest rates, their direction and momentum are one of the most important drivers for gold’s price. Rates were in negative territory most of the time since 2011, but lately they trended higher. This increased the cost of holding gold, which created an unfavorable environment for gold’s price, but we expect that to change.
Trade war and gold
Another noticeable aspect in gold’s price is the U.S. – China trade war. This may be on a pause now, but we can’t be sure how long the cease-fire will exist knowing that Donald Trump is rather hectic in the subject. Anyhow, developments in this dispute have been the main driver of gold since April, via their effect on the Chinese yuan and its direct impact on gold priced in dollar terms.
The Chinese government has the potential to weaken the yuan offsetting the risk of higher tariffs and therefore lower gold prices. Now it’s hard to see a quick resolution for this trade war, because both parties believe that they’re strong enough not to bow in this game. But the U.S. also has weapons: a negative stock market event coupled with a Fed reversal in policy could weaken the dollar, which could resolve the problem of the U.S. – China trade deficit. This could offer a nice rally in gold prices.
Increasing gold reserves
Gold reserves of emerging markets have increased consistently since reaching a low in 2006. China, Russia, and Turkey have boosted their central bank gold holdings substantially since 2007, by 307%, 408% and 486% respectively. Some even believe that China has even higher gold reserves, but they keep it in secret as it would affect the markets in an unfavorable way for them.
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Smaller countries like Poland and Hungary have also joined this club because of safety and stability concerns. What’s more, many central banks have started to repatriate their gold reserves as the monetary environment is changing. The increase in gold reserves can be seen as the evidence of growing distrust in the dominance of the US dollar and the global monetary and credit system associated with it. Even the long-term commercial players have been collecting physical gold and silver. Anyhow, this shows that gold is getting more and more popular and this isn’t mirrored in its prices yet.
What to expect?
All the facts listed above (especially the growing popularity of gold around the world) are leading us to believe that gold has a bright future, and this might be a great time to invest in it. This is even a better idea as gold performs historically poor in the last quarter, so prices are lower now. December is also an important month for Fed and its rate hike, so we can even expect a new low for gold.
But these low gold prices won’t remain for long and on the long-term perspective we remain extremely bullish on gold and other precious metals. This means thinking about buying gold now can be a great idea.
Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.