A Closer Look at Gold’s Price Movements

- September 17th, 2019

Interested in gold investing? The Investing News Network has put together a guide to gold’s price movement and the catalysts behind it.

As the price of gold continues to climb, many investors are taking a closer look at the factors that shift and shape the yellow metal’s movements.

While investing in gold can act as a hedge in one’s portfolio, it is pertinent for market participants to understand the underlying catalysts which cause the precious metal to both rise and fall.

Read on for an in depth look at historical gold prices, what elements are moving gold now and what changes in the gold price could happen in the future.

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Gold price movements: Historical gold prices

In order to understand the present, it is important to go back and evaluate what happened in the past — and this is no different when looking at gold.

People did not begin using the yellow metal as a source of currency until 643 BC, and it wasn’t until the reign of Roman Emperor Augustus, which began in 30 BC,  that the price of gold was set at a specific value — 45 coins per pound. Prices would not change until the 211 to 217 AD time period, when the value of gold rose to 50 coins per pound.

A major jump for gold came in 306 AD, when Constantine the Great valued the precious metal at 70 coins per pound in order to finance the military. This was also a period of time when taxes were increased and the first signs of hyperinflation in the economy became apparent.

Jumping ahead to a more pertinent time period in gold’s history, it is important to examine the monetary policy of Britain and the US.

In 1791, when the metal was under the British gold standard, prices were set at US$19.49 per ounce. But when the US created the Gold Standard Act in 1834, prices were bumped up to US$20.69. It is this path of gold fixing that led to gold’s position today: a metal with a price per ounce that can change with the wind.

Both the price of US$20.69 and the gold standard remained in play until 1933, and were relevant factors in the Great Depression of 1929, which began after the US Federal Reserve raised interest rates in 1928 and the stock market crashed in 1929. After that, investors flocked to gold as a safe haven, trading in their paper currency for the yellow metal.

This caused the Fed to continually raise interest rates in fear that the country might run out of gold. In turn, the value of the US dollar increased, pointing to the beginning of the end of the gold standard.

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The US in particular decided to make the move away from gold because the country was facing both mounting unemployment and spiralling deflation.

In the early 1930s, the US government was unable to stimulate the economy and believed that it needed to deter people from cashing in deposits and depleting the gold supply. In order to rectify the damage done by surging interest rates, in 1933, US President Franklin D. Roosevelt cut the US dollar’s ties with gold, allowing the government to pump money into the economy while lowering interest rates.

In 1944, the price of gold changed again when several powerful countries negotiated the Bretton-Woods Agreement, which made the US dollar the official global currency and set the price of gold at US$35.

Two other key years that are important to historical gold prices are 1971 and 1976. In 1971, US President Richard Nixon stopped foreign central banks from being able to exchange their dollars for US gold. This move wiped the dollar off of the gold standard entirely and was Nixon’s attempt to fix an economy that was suffering from a combination of inflation and recession.

By 1976, free from the US dollar, the yellow metal made its largest gain up to that point, surging to US$120 in the open market.

By the time 1980 rolled around, traders managed to bid the price of gold up until it reached US$594.92, using it as a hedge against double-digit inflation. Heightened interest rates and an increase in inflation caused another recession, and, eventually, precious metals lost value within the open market.

For gold, that meant its price remained around US$410 until the mid-1990s, when it drastically dipped again to around US$288 thanks to steady economic growth.

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At this point in time, the trend of gold as a safe haven became increasingly apparent, as the metal shot up to US$869.75 during the 2008 financial crisis and hit an all-time high of US$1,895 on September 5, 2011, because investors were deeply concerned that the US would default on its debt.

Since then, the price of gold has declined from those highs, but its historical roots are an important road map to current price trends and an indication as to where the spot price of gold may go in the future.

Gold price movements: Current gold prices

There are many factors that are currently molding gold prices. Factors such as the movements of the US dollar, present interest rates, geopolitical turmoil, fear over a slowdown in economic growth, as well as supply and demand are dominating what happens to the precious metal.

The US dollar

With the gold spot price recently shooting past the US$1,550 per ounce level for the first time in over six years, factors such as the current interest rate and ongoing geopolitical concerns are presently affecting the price of gold in a positive way.

The first element supporting the yellow metal is the fact that the greenback has lost much of the steam that it gained last year and into the beginning of 2019. Since gold has a negative correlation to a thriving US dollar, the greenback’s recent decline has been supporting the yellow metal and its upward price movements.

In fact, gold has interesting currency-like tendencies. BMG Bullion notes that gold retains its purchasing power yearly.

While gold works as a currency, many don’t see it as one, as bullion is not something that could be used to purchase goods and services. However, it has ties to the greenback and, similar to other currencies, it has price fluctuations — as seen in recorded history, it typically increases as the US dollar drops and falls as the dollar moves up.

The yellow metal can be bought and stored and it has the ability to be converted into money in a variety of currencies, which is currently appealing to gold investors since the dollar is relatively stagnant and precious metals prices are on the rise.

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Geopolitical circumstances and global economic slowdown

A basket of geopolitical issues have sent investors running towards the safe haven nature of gold. Towards the end of August, Washington revealed plans to place an additional 5 percent duty on US$550 billion worth of Chinese goods following China’s announcement of retaliatory tariffs on approximately US$75 billion worth of US products. As investors caught wind of the growing tensions between the two powerhouse countries, they flocked to gold in order to have the safe haven in their portfolio to offset the downtrend that the US dollar took.

The situation between the US and China has been grabbing the attention of market participants for over a year now, triggering concerns around a global slowdown.

Speaking about gold’s positive price movement, Brien Lundin, editor of Gold Newsletter, told the Investing News Network (INN), “Right now, the primary drivers for gold have been the US-China trade dispute and the explosion in negative-yielding bonds worldwide.”

“There’s also a strong undercurrent of demand for gold based on the issues behind that explosion in negative yields. In short, the global economy is now completely dependent upon not only easy money, but ever-easier money,” he said. “Not only that, but a decade of exorbitant debt creation has ballooned the US federal debt to levels that will no longer allow for higher rates, much less anything approaching historically normal rates.”

Supply and demand

While supply and demand are not mentioned as frequently when discussing current price trends for gold, they still play a part. Demand for gold tends to push the price of the yellow metal up when supply is threatened. This is why investors who believe that we’ve reached peak gold tend to be interested in the yellow metal — they worry that there is no more new gold to be discovered and the source for investment items such as gold bars and gold bullion coins is threatened.

On the other hand, when investor demand is low due to lacklustre prices, such as what was seen throughout most of 2018 and the beginning of 2019, the metal is pushed down even further. This lack of interest has caused the yellow metal’s price to dip and stagnate in the last one and a half years. Although gold’s price chart is currently on the rise and in the green, the opportunity for investor demand to once again slide still lingers.

In fact, Lundin told INN that if the situation between the US and China clears, it could potentially have a negative impact on the metal.

“I think the potential for a resolution in the China trade issue is a risk factor for gold — if an agreement is reached, there’s a chance for a very significant drop in the gold price.”

This reaction would see investor demand retreating and more than likely placing higher stock on other investments within their portfolio.

Interest rates

Finally, gold is being supported by July’s interest rate cut, which was implemented by the US Federal Reserve at the end of that month for the first since 2008. While the metal initially retreated following the announcement, it has since steadily rallied once the decreased rates were put into place.

In addition to the most recent cut to interest rates, market participants have begun bracing for another chop, which is expected to take place in September. Historically speaking, lowered interest rates have caused the yellow metal to climb within the market and industry experts believe that this next round of cuts will have a similar effect on the price of gold.

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Gold price movements: Gold investment options

With the current price of the yellow metal on the rise, there are multiple ways to get into the gold space as a first time investor. Market participants are currently using these four ways of investing which have been supporting the monetary value of gold.

Gold stocks

Like all publicly listed stocks, gold companies issue shares that are available for investors to trade. When you purchase shares of a gold stock, you are essentially purchasing a stake in the company, making returns or losses from its profits.

There are two main paths to take when purchasing from companies with gold mines. One way of obtaining stock is by purchasing it from major mining companies and the other way is investing in a junior miner.

While both avenues have their pros and cons, it’s worth noting that investing in a junior gold stock can be inherently risky. Since these companies often fail due to the risks associated with exploration and development, you stand a greater chance at also taking on a loss.

Finally, market participants can also obtain gold shares through investing in gold streaming and royalty companies. You can learn more about royalty and streaming stocks here.

Although no stock is 100 percent foolproof, investing in a successful mining company can alleviate some of the stress of a down market when you keep in mind that if a company’s share price goes down, it becomes more affordable to purchase and investors can more than likely anticipate that it will rise again.

Physical gold

Physical gold investors are generally looking for items that are 0.999 fine. Several products fit this description, and one of the most preferred is gold bullion coins, such as the South African Krugerrand or the American Gold Eagle.

Another option is gold rounds, which are similar to coins, but are not legal tender. Both gold coins and gold rounds come in various sizes, usually ranging from 1/10 ounce to 1 ounce, though other less common sizes are available.

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Gold bars are another popular option. They also come in a variety of sizes, and as choices can range from a 1 gram bar to 400 ounce bar, this category of products can accommodate a range of investors.

When the objective is to get the most metal for the least money, it’s generally best to shop for gold rounds and gold bars, which tend to be cheaper than gold coins of the same weight. The premium for gold coins is higher because of the credibility that they receive from being fabricated by government mints and because of the design detail on them.

Another factor that may need to be considered is the amount to be invested. Large investments may be best made in bars since larger sizes are available. Further, it is often easier to manage large products than it is to manage an array of smaller gold items.

However, physical investors need to also give forethought to occasions when they may want to sell their gold. Large products will require liquidating a larger portion of one’s gold portfolio, and such products may be more difficult to sell in some instances. Individuals making ongoing or significant investments may therefore want to consider purchasing gold in various weights.

Gold futures

A futures contract is an agreement to buy or sell gold on a date in the future for a price that is determined when the contract is initiated. The futures market is often referred to as an arena for paper trading. Generally, the bulk of the activity is just that, as metal is not actually exchanged and settlements are made in cash.

However, the futures market can also be an arena for purchasing physical gold. That is not to suggest that it is the best source of metal for all investors. Obtaining gold through the futures market requires a large investment and involves a list of additional costs. The process can be complicated, cumbersome and lengthy, which is why this option is considered best for highly experienced market participants. You can learn more about gold futures here.

Gold exchange-traded funds (ETFs)

Gold ETFs are often considered a lower risk investment and have a number of benefits for market participants.

Gold ETFs provide exposure to metals prices by offering investors the opportunity to purchase shares that represent a quantity of gold. Neither that nor the fact that an ETF is physically backed brings an individual any closer to gold ownership. A gold ETF is not a vehicle to acquire gold.

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Investors should clearly understand that investing in gold exposure is not the same as purchasing physical metal. The popularity of exchange-traded funds (ETFs) underscores how easily people can begin with one objective and end up heavily invested in products of a different nature.

For example, physical gold is known for being a hedge against economic and political uncertainty, and owning shares of a physical gold ETF provides investors with this same security — without the hassle of buying and storing the yellow metal.

Since gold tends to rise when the US dollar is weak, purchasing a gold ETF could balance out any investment that has the potential to decline when the greenback does. Conversely, selling gold ETF holdings can be beneficial when the greenback is making gains.

Gold price movements: Future gold prices

What historical changes in gold prices show about the future is that prices are cyclical. While the factors that affected the metal during the Roman Empire are not what change the spot price of gold today, history shows that there will always be market fluctuations. Further, by looking at gold prices today, investors can get a sense of what conditions are needed for it to thrive and what circumstances make it drop.

Below are some future price predictions from various gold experts.

For Rob McEwen, chairman and chief owner of McEwen Mining (TSX:MUX,NYSE:MUX), more significant gains are in store for the yellow metal. Speaking at the Precious Metals Summit in Beaver Creek, Colorado, McEwen told INN, “I’ve always had a US$5,000 number, and I think it can go much higher than that.”

John Kaiser of Kaiser Research has high price predictions for the precious metal, recently telling INN, “I think we are in the early stages of seeing a massive repricing of gold into the US$2,000 to US$3,000 per ounce range. … The public won’t come in until they see gold really challenge the US$2,000 mark.”

“This gold trend has legs to it,” he added. “We’re at the beginning of a big cycle.”

Additionally, in FocusEconomics’ most recent report, panelists stated that they believe gold prices could slightly dip from current highs by the end of the year to average around US$1,475 per ounce.

“Nonetheless, gold prices will likely remain elevated, supported by expectations of further monetary easing globally, ongoing geopolitical uncertainty and negative yielding sovereign bonds. Our panel sees gold prices broadly stable through 2020, averaging US$1,458 per troy ounce in Q4,” FocusEconomics noted.

Don’t forget to follow us @INN_Resource for real-time updates!

Securities Disclosure: I, Nicole Rashotte, currently hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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