The yellow metal’s impressive pace continued over the next few years, driven largely by economic uncertainty brought on by the COVID-19 pandemic. Gold first breached the US$2,000 price level in mid-2020. Gold later hit US$2,074.60, its highest price at the time of this writing, on March 8, 2022, as Russia's invasion of Ukraine launched amidst ballooning inflation around the world, increasing the appeal of safe-haven assets.
Since then, increasing interest rates meant to tackle out-of-control inflation have pushed prices for the yellow metal down to its lowest level in 2.5 years at just above the US$1,600 per ounce level. Now market watchers are wondering when gold will go up?
Predicting the gold outlook is difficult, but there are definitely factors to keep in mind. Read on to get an idea of what drives the gold price, from supply and demand to economics and manipulation.
Gold investing: Supply and demand
Gold mine production was mostly flat for several years leading up to 2019, a year that marked a decline. The COVID-19 pandemic led to further reductions in 2020 as gold miners had to curtail operations. But the story may be different in 2021 — according to UK-based analytics company GlobalData, total gold mine production rebounded by more than 5.5 percent to 115.8 million ounces in 2021 and that figure is expected to continue growing at a CAGR of 3 percent by 2026.
Most gold is produced in China, with Australia and Russia being the second and third top producers globally. The three countries put out 370 metric tons (MT), 330 metric tons and 300 metric tons of the yellow metal respectively in 2021. China and India hold major physical gold-buying power, and the title of world’s largest gold consumer is often a toss up between the two.
Looking at consumption in 2021, gold demand rose by 10 percent year-on-year to a total of 4,021 MT — as the market “recouped much of the COVID-related losses sustained during 2020”, reported the World Gold Council (WGC). However, exchange-traded funds saw outflow of 173 MT for a 5 percent drop in total holdings.
On the flip side, gold jewelry demand marked a significant turnaround in 2021, jumping by 67 percent. As for gold bars and gold coins, demand rose 31 percent from the previous year.
It’s worth noting that central banks have been net buyers of gold for over a decade now. In 2020, their buying dropped by nearly 60 percent year-on-year, although Q4 brought a return to net buying. In 2021, central bank buying grew by 82 percent year-on-year, which “pushed global gold reserves to just under 35,600t, their highest for almost 30 years,” according to the WGC.
As a side note on supply and demand in terms of gold mining stocks, investors should be aware that most of the pure gold ever mined still exists and is accessible — for example, as jewelry or gold bullion. In contrast, many other metals come off the market when they are used.
That means gold-mining companies and the gold space as a whole are also affected by saving and disposal tactics, and not just by simple supply and demand.
Gold investing: Economics and manipulation
While supply and demand are key factors in the gold market, it’s important for investors who want to buy and sell to be aware that they’re not the only factors that can have an impact on the metal.
In particular, global economics can have a dramatic influence on gold. Put simply, gold earns no interest, and thus tends to fare better when interest rates are lower; conversely, when interest rates are higher, it becomes less desirable to buy.
Interestingly, that relationship has been less visible in recent years. Four years ago, 2018 proved to be a year when interest rate hikes actually supported the price of gold, and when the US Federal Reserve made the decision to halt interest rate hikes for 2019, the gold price increased.
Gold investing is also often favored by investors as a safe haven or inflation hedge in times of economic downturns and political turmoil. There are countless instances of people who invest in the precious metals market and use gold as a hedge in times of uncertainty — for example, gold and gold stocks tend to get a bump every time the trade war between the US and China intensifies.
However, rising interest rates make gold less alluring as a safe haven asset as both the US dollar and Treasury yields tend to rise alongside interest rates. After the Fed hiked interest rates by another 75 basis points at its scheduled September 2022 meeting, gold lost further ground and has continued its decline through the end of the month.
"There are going to be bounces in gold, but I still believe that we're probably headed to that US$1,500 area," Nick Santiago, CEO and chief market strategist at InTheMoneyStocks.com, told the Investing News Network. "If we breach US$1,500 we'll go to US$1,450. But down to US$1,500 I will be a heavy buyer of the precious metal."
Price manipulation is also a concern in the gold space, and some market watchers see it as a major source of suppression. Luckily, this issue is one that the world’s gold market participants are keen to address. Indeed, early in 2015, the long-running London gold fix was replaced by the LBMA gold price in a bid to increase gold price transparency. Though the process still involves a variety of banks collaborating to set the gold price, the system is now electronic.
Gold investing: The future
The current global inflationary crisis may be eroding the never-before-seen highs that gold gained in the past two years, but interest in buying and selling the metal remains strong around the world. Many economists believe rising interest rates will most likely result in a recession and Fed cuts to interest rates. If that ends up being the case, the gold market may once again see gold breaking out above the significant US$2,000 level.
Those keen on gold investing would do well to remember that like most markets, the gold sector is cyclical, meaning that there is volatility. The Investing News Network’s 2022 gold price outlook includes a more detailed view of the future for gold and gold investing. You can also check out our latest quarterly update on gold by clicking here.
This is an updated version of an article originally published by the Investing News Network in 2015.
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Securities Disclosure: I, Melissa Pistilli, 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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