Investors are piling up gold in increasing numbers to protect their investment against probable losses. Gold prices have climbed from about $1073 an ounce at the beginning of the year to nearly $1339 today, which translates into a remarkable increase of about 25%.
The year 2016 is certainly turning out to be a great year for gold investors, and they are reaping rewards of putting their faith in gold bullion despite the bleak picture painted by financial pundits at the start of the year.
So, the question is what’s fueling this increase in gold prices? What are the market factors that are pushing gold to reach record highs this year? And most importantly, will the price of gold continue to accelerate or lose its steam by the end of the year?”
Here we will take a look at some of the factors that are driving gold prices, and also determine future trajectory of this precious metal in the coming months.
1. The Greenback
Gold and dollar are in a fire and water relationship. There is an relationship between gold prices and dollar – when gold has been trending upwards, the dollar value shows a downward trend in the market, while the opposite happens when the gold displays an upward trend.
Falling value of dollar is one of the main factors that are driving gold prices upwards. The property of gold as a hedge against exchange rate fluctuations has been well established. Investors are shifting their money from currency to gold as the dollar depreciates in value.
Although dollar value has strengthened in recent weeks, it is decreased by a large margin as compared to start of the year. The greenback has declined in value against all the major currencies since the start of this year. This is one of the reasons that is fueling gold prices as investors are swapping weakening dollar with gold.
2. Fear of the Collapse of European Union
Fear of economic collapse due to Brexit is another reason that the gold prices are appreciating. In the investment world, fear and uncertainty makes investors turn to gold to protect their wealth. At the present investors are fearful of an economic clout due to a possible breakup of the European Union.
After the breakup of Britain from EU, investors are rightfully concerned about the global investment climate. British economy is the fifth largest in the world measured by GDP, and it is a major trade partner of the US. So, any hiccups in its economy will have far reaching impact on world’s economy. And that is why increasing numbers of investors are turning to gold to protect their wealth against potential economic collapse, which is fueling price of the shiny metal.
3. China’s Appetite for Gold
China’s insatiable desire for hoarding gold was one of the main reasons that gold has experienced remarkable appreciation during the previous gold rush that lasted until 2011. The economic super power has been increasing its gold reserves to diversify and hedge its foreign holdings. Chinese Central bank gold reserves in the past twelve months has increased by about 71.4% as compared to 2.85% increase in global reserves of the metal.
Apart from central bank, individual investors and corporations are also shoring up on gold due to a weakening Chinese currency. Gold is a liquid and tangible assets that not only protects wealth value but also can easily be converted to cash. That’s the reason a large number of individual and institutional investors in China are diversifying their investment portfolio by turning to gold.
4. Low Level Interest Rates
Gold demand generally increases when the interest rates are kept at a low level. Despite the fact that gold has no yield, it does serve as a better option when the fixed interest bearing instruments offer low returns. And this is also true at the moment. Gold serves as a better investment option for investors that want to park their money and prevent their precious savings from losing value due to inflation or currency fluctuations.
At the end of the 2015 it seemed that the tide was turning.The hopes of a rate rise, however, were shattered in June this year, and expectations of a future increase in rates in the near future have now receded. Meanwhile, the Bank of Japan has slashed rates below 0%, with Britain likely to follow suit to prevent its economy from plunging into a recession. All of this bodes well for gold and other precious metal investment instruments.
5. Greek Debt Crises
Although there is relative calm at the Greek front as compared to chaos of the previous year, the country has yet to come out of the deep debt hole that it has fallen due to poor monetary decisions. The negotiation for a debt deal is not likely at the moment with no one predicting a restructuring until the next Government is elected at the end of 2017. As a result the fear of reverberations caused by a Greece default is still strong, and which is also fueling appreciation in gold prices.
Future Outlook for Gold!
Some experts believe that gold prices are getting close to a ceiling, and that the precious metal value will stall by the end of the year. However, there are others who believe that gold prices will likely continue to reach new highs in the near future due to worsening state of the global economy.
At the moment, it can’t be predicted whether the bears or the bulls will have their way when it comes to gold investment. However, when looking at the factors examined in this article, it seems that the gold is expected for another wild ride similar to the one that was experienced at the end of the last decade.
