It’s been a roller coaster ride for gold over the past few years. After hitting an all-time high of over $1,900 an ounce in 2011, gold prices fell to a low of around $1,050 in 2015. Since then, prices have fluctuated between $1,200 and $1,350. So, is now a good time to buy gold?
There are several factors to consider before making any investment, and the current state of the economy is just one of them. While there’s no guarantee that gold prices will continue to rise in the future, history does offer some clues. Over the long term, gold has traditionally maintained its value or increased in value when other investments have lost value. For example, during the Great Recession of 2008-2009, while stock values plummeted, gold prices rose.
Of course, no investment is without risk, and there’s no guarantee that gold prices will continue to rise. However, if you’re considering investing in gold as part of a diversified portfolio, now may be a good time to buy.
Table of Contents
Economic Factors That Drive The Price Of Gold
Gold is a Precious Metal that’s abundant in the Earth’s crust but not in an easily accessible form. Gold is rare enough that it can only be produced selectively. In addition, it has a long history of being accepted as a global currency, making it a stable store of value. Gold is also a good conductor of electricity and heat, doesn’t rust, and is non-toxic, making it an ideal material for various industrial and medical applications. These properties make gold a valuable commodity, which is why it’s often used as an investment.
Inflation
Inflation is one of the most important economic factors driving gold prices. Inflation is the increase in the price of goods and services over time. When inflation goes up, the purchasing power of money goes down. This means it takes more money to buy the same goods or services.
Inflation is a major concern for gold investors because gold is seen as a hedge against inflation. When inflation goes up, the price of gold also increases. This is because investors believe that gold will retain its value better than other investments, such as stocks or bonds, when inflation is high.
Economic Uncertainty
Gold is often seen as a haven investment and is traditionally used as a hedge against economic uncertainty. When there is economic uncertainty, the price of gold usually goes up. This is because investors are looking for a safe place to invest their money, and gold is seen as a safe investment. Some factors that can cause economic uncertainty are: -Interest rates: when interest rates are low, gold becomes more attractive to investors because it provides a higher return than other investments. -Inflation: Gold becomes more attractive to investors when inflation is high because it keeps its value better than other investments. -Geopolitical unrest: when there is unrest in the world, investors tend to buy gold as a haven investment.
Interest Rates
The relationship between gold and interest rates often needs to be understood. Rising interest rates are frequently seen as bearish for gold, but this is not always the case, particularly in the long term. There are several historical periods where gold and rising interest rates have coexisted.
Real interest rates are the most important factors determining the gold price in the short-to-medium term. Real interest rates are nominal interest rates (the advertised rate) minus inflation. When real interest rates increase, it becomes more attractive to hold cash or bonds and less attractive to hold gold.
In the long term, however, it is simply not true that higher interest rates are bearish for gold. To understand why we must look at the relationship between debt and inflation. As a general rule, inflation tends to pick up over time when debt levels increase faster than GDP (i.e., when debt/GDP ratios rise). Higher inflation debases the value of fiat currencies, making gold more attractive as a store of value.
Higher interest rates could be bullish for gold in the long term, even though they may be bearish in the short term. Given current levels of global debt (both public and private), it is likely that we will see higher inflation over the next several years, regardless of what central banks do with interest rates. Thus, even though rising interest rates may be bearish for gold in the short term, they are often bullish for gold in the long term if rising debt/GDP ratios accompany them.
Gold As A Safe Haven Asset
Gold is often seen as a haven asset in times of economic or political uncertainty. The metal is used to hedge against inflation, currency debasement, and stock market volatility. When investors are worried about the future, they tend to move into gold as a way to protect their wealth.
This demand for gold can cause the price of the metal to increase, making it an attractive investment for those looking to make a profit from the precious metal. However, it is important to remember that gold price is only sometimes stable and can fluctuate based on several factors. As such, you are doing your research before investing in gold is important.
Gold Demand In China And India
Analysts say that gold demand in China and India, the world’s two largest metal consumers, is poised to remain strong in 2021 as both countries continue to recover from the coronavirus pandemic.
China is expected to consume around 1,000 tonnes of gold this year, while India is likely to consume around 800 tonnes, according to estimates from the World Gold Council (WGC).
“Both countries are on the road to economic recovery, and this is supportive of gold demand,” WGC managing director for Asia Pacific Joshua Rotbart told CNBC’s “Street Signs” on Tuesday.
The WGC is a London-based industry body representing gold producers’ interests.
“In China, we’ve seen very strong investment demand gold, which has been driven by concerns around inflation as well as worries about the U.S. dollar,” Rotbart said. “In India, we’ve seen similar investment trends but strong jewelry demand.”
He added that central bank buying had also supported gold prices in both countries.
Gold Supply
The world’s gold supply comes from various sources, including gold mines, recycling, and central banks. It’s estimated that around 190,040 tonnes of gold exist above ground as of 2019. The majority of this gold is in the form of jewelry (56%) or investments (40%), with a small amount going to industrial and dental use (4%).
As for yearly production, China is the largest producer of gold, followed by Australia and Russia. Together, these countries account for around two-thirds of global gold output. In 2018, global gold mine production was estimated to be 3,332 tonnes – this is forecast to increase to 3,402 tonnes by 2023.1
It’s worth noting that central banks also hold large reserves of gold – as of late 2018, they had 33,000 tonnes between them. The United States is the largest holder, with 8,133.5 tonnes (around 76% of its foreign currency reserves).
Gold Price Forecasts For 2023
Gold prices are projected to average $2,100/oz in 2023, a 0.9% increase from the 2020 average of $2,076/oz.
Gold prices are expected to rise in 2023 as central banks continue to print money, and stimulus measures prop up asset prices. We expect gold prices to peak in 2023 as the Fed begins to taper asset purchases and raise interest rates.
Investors should buy gold on dips in price as the long-term trend is still higher. Our end-of-year target for gold is $2,300/oz.
Conclusion
Only you can decide if now is a good time to buy gold. By understanding the factors that affect the gold market and keeping an eye on the market trends, you can make an informed decision about whether or not to invest in gold.
