Where is the Gold Market Right Now?

Gold has been a fairly quiet investment over the past three or four years. That’s because the economic and financial situations in both the US and much of the rest of the industrialized world have been stable. There are problems to be sure, but at the moment they’re largely seen as being under control. That’s why the price of gold is been so predictable, and why it’s likely to remain so until the current dynamic experiences a major shift.

WHERE THE GOLD PRICE IS RIGHT NOW AND WHERE ITS BEEN IN RECENT YEARS

The price of gold is currently hovering at $1,275 per ounce, which is roughly the middle of its 52-week trading range of $1,139.70 to 1,362.40. It is been mostly range-bound throughout 2017, showing little indication of breaking out of the range in either direction.

The price of gold hit a recent low of $252 in August 1999, amid a multiyear wave of gold sales by central banks. It’s all-time high of $1,890 was achieved in August 2011. Since hitting that peak, it bottomed out at $1,066 in November 2015.

FACTORS AFFECTING THE PRICE OF GOLD

Most investors have little understanding of the magnitude of the gold market, or of the forces that drive the price higher or lower. But gold is actually one of the most important commodity markets in the world, being second only to crude oil.

Gold is highly valued because of several factors, including:

• Limited supply
• Durability – unlike other metals, gold doesn’t rust or corrode
• Use in jewelry and other highly valued products
• Its historic use as money, going back thousands of years in human history
• Its common use as money by banks, governments and central banks
• Its universal acceptance – gold is recognized for its value in virtually every country in the world
• Portability – because of its high unit value, a small amount of gold can easily be carried from one location to another, and from one country to another

Because of its recognized monetary value, the gold price isn’t subject to factors similar to other commodities. For example, virtually all commodities trade based on supply and demand. Gold, on the other hand, is determined largely by economic and financial factors, and even by confidence in central banks and governments.

Interest rates are a major factor. While high interest rates tend to suppress the price of gold (and most other assets), low interest rates can facilitate a rise.

Factors affecting the price of oil can also affect the price of gold. Since gold tends to react to international disturbances – the same ones that might affect oil – it may spike in price when oil is rising significantly.

GOLD SUPPLY AND DEMAND

According to the World Gold Council, world gold demand for 2016 exceeded 4,300 tons, or about 143 million ounces. Of this total, nearly half was used for investment (gold bars, coins, ETS, etc.), and purchased by central banks. The remainder was used in the production of jewelry, or for use in technology.

Total supply provided for 2016 was nearly 4,600 tons, or about 147 million ounces. More than 3,200 tons of supply was provided by mining, but most of the rest came from recycled gold, which typically comes from old jewelry.

But once again, the price of gold isn’t determined strictly by supply and demand factors, at least not in the way that it applies to other commodities. That’s because much of the world’s gold supply is held above ground. For example, the world’s major central banks own approximately 32,000 tons of gold in reserve. This means that slightly more than 1 billion ounces of gold are currently held in reserve by central banks. That’s 10 times more than the annual production of gold bullion from gold mines.

Because of the size of central bank gold reserves, additions and subtractions from those reserves can have a greater impact on the price of gold than annual mining production. In 2016, central banks added nearly 400 tons of gold to their reserves.

THE RELATIONSHIP BETWEEN GOLD AND THE US DOLLAR

Since the US dollar is the primary international reserve currency, and has been for more than 100 years, the price of gold in dollars is its most important exchange value. But this isn’t just incidental to the dollar’s reserve currency status.

Since gold has traded as money for thousands of years, and the dollar has only been the global reserve currency for about a century, the two often run in opposite directions. When the dollar gains in strength, gold typically falls in value. When the dollar weakens, gold frequently increases.

These price swings in gold versus the dollar are more pronounced at the extremes. For example, extreme weakness in the dollar could result in a record price for gold. At the opposite end of the spectrum, pronounced strength in the dollar could send gold plummeting.

This inverse relationship between gold and the US dollar is akin to a competition between competing currencies. The dollar represents new money, while gold represents old money. Any type of weakness in the dollar sends investors into gold, which is seen as a safe even asset when the dollar weakens.

But change in the price of gold isn’t automatic with fluctuations in the value of the dollar. The greatest impact takes place at the extremes of valuation in the dollar.

A significant dollar decline is often the result of global insecurity, or disturbances within the US itself. Stability of the dollar is tied to stability of the US, and the international perception that the US remains firmly in control of the global order. Perceived threats to that control typically cause the gold price rice, often significantly.

For this reason, gold is also seen as a form of “disaster insurance”. That makes it a countercyclical investment, and perhaps the greatest of its kind.

THE CURRENT “STABILITY”

As of 2017, both the domestic and international situations are relatively stable. Yes, there are concerns on the domestic front in the US. These include declines in the rate of home ownership and the labor participation rate, which point to fundamental economic weakness. There is also the high and rising national debt level, as well as the near perpetual threat of the toppling of the administration of Donald Trump.

Internationally the threat from North Korea seems to be growing every day. There is also a rising atmosphere of confrontation between the US, and China and Russia. Meanwhile, the situation in the Middle East remains as unstable as ever, and the European Union is facing a plethora of political and financial disturbances.

But at the same time all that is happening, US economy continues to grow slowly but steadily. Interest rates remain at near record levels, and both the stock market in the US housing market are at record highs.

Given the level of financial stability that currently exists in the US, both the domestic insecurities and the international disturbances are widely seen as having a minimal impact.

The result is stability in the price of gold, which has fallen considerably from its 2011 high. But note that in 2011 the progress in moving out of the Financial Meltdown was slow and problematic. The economic and financial situations in both the US and the world were seen as tentative at best, and gold benefited from being a safe haven against those uncertainties.

It’s likely that the price of gold will remain in its current trading range as long as financial peace continues to prevail in the US and in global financial markets.

WHAT COULD CAUSE GOLD TO BREAK OUT OF IT’S RECENT TRADING RANGE

We just provided a lengthy list of both domestic and international affairs that can break open and cause the price of gold to rise. But perhaps more significant will be the impact of any kind of negative change in the financial markets.

Interest rates are perhaps the biggest single factor. They have been hovering at or near historic lows since 2009. These low rates have been providing fuel for both the stock market in the real estate market, as investors have chosen equity over fixed income investments, due to extremely low rates of return on the latter.

Should interest rates rise in a major way, this could cause both stocks and real estate to tumble in value. More significantly, it could cause the bond market to weaken and even collapse. Should that happen, default rates on loans and mortgages would almost certainly increase. That would cause investors to lose confidence in the US dollar, and flock to the safety of gold. If the increase in interest rates is great, we could very well see new records in the gold price.

The predictions of gold rising to $5,000 or $10,000 – which seem incredible now – could become a reality more quickly than anyone now suspects. That’s because a breakdown in the low interest rate structure can cause many of the other economic and international problems to unravel in short order.

Rising interest rates could cause sovereign debt collapses in Europe and elsewhere, that would drive investors out of traditional investments like stocks and bonds, and into countercyclical investments like gold and silver.

We can’t know how this will play out right now. But we do know that all of the elements are in place for a dramatic surge in the price of gold.