On the 20th of July, the price of gold hit a five-year low, thus reflecting the present demand and supply as well as the expectations about the future. Two major purposes are served by this yellow metal: firstly, it serves as a commodity (for jewelry, dentistry, electronics etc). Secondly, it serves as a means of storing value – mostly as a kind of insurance policy against the upheavals in politics.
Unlike most other commodities, gold costs money to store and brings no income. Presently, this precious metal and the investors who favor it are in trouble. After the financial crisis, the value of gold became very strong and hit its peak price in 2011. After this period, the value of gold has taken a plunge and hasn’t looked back since then.
Its steady decline in value is represented in the chart below:
Some experts are of the belief that the price of one ounce of gold may drop below $1,000 before the year runs out.
The current strength of the US dollar is the most direct cause of gold’s woes. Because the value of gold is priced dollars, if dollar gains strength, the precious metal is marked down proportionally. Another factor is that it is the revival of the American economy that is prompting the increase in dollar, which automatically connotes a higher interest ratio and this isn’t good for gold and its value.
The opportunity cost of owning any zero-yield asset is increased whenever the monetary interest rate soars. Returns on investment could be made on treasury bills and other debts, instead of allowing money to be tied up uselessly in bullion. Heavy corporate income have like-wise effect: when dividends are high, you wouldn’t want to miss out on them.
More so, the fact that the producers of gold will not be able to keep up with the level of gold mined on a yearly basis, the limitation in the supply of gold will be felt more with every coming year. Gold shortage in the nearest future is almost inevitable. Experts claim that at the present rate of production, depletion in gold reserves will be inevitable; especially considering the rate at which China and India are making demands.
The major hope which gold investors have is that the Chinese government wishes to turn the Chinese Yuan currency into a reserve currency; hence, it would need to increase the amount of gold it owns to match the quantities possessed by the central banks in the West. Although China has successfully increased its gold reserves a little bit, it is still not happening. Its bullion hoard is still weak and there is a fall in the holdings of gold in China as a share of all its reserves.
It is almost impossible to accurately predict the future price of gold or the price trend expected. If you seek the opinion of 10 financial analysts, there is a probability that you will get ten different suggestions. However, the improvement in forecasting techniques using the fundamental technical and inter-market analysis, some individuals believe they can come close to giving an accurate prediction.
The unusually good political news also causes gold to suffer. The chances of a messy default and the breakup of the single currency have been reduced by the euro zone’s deal on Greece. The risk of war has also been reduced because of the nuclear deal with Iran; this could boost gold.
Certain gold bugs are of the position that the rate at which money is created out of the thin air by central banks (quantitative easing) would doom the whole edifice of global finance eventually. However, the current confidence on “fiat” money is undimmed by the general public.
Some wags also claim that if the impending complete collapse of the global economy were to finally happen, lead (used to make bullets) could be more valuable than gold.
[Photo used for the featured image: “Bank of England gold vaults” by www.bankofengland.co.uk, used under CC BY-NC-ND]