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What is the current value of gold?

Gold has recovered from a low of $1160 in August 2018 to trade near $1550 in early September 2019. This is the highest level since April 2013. Will gold continue to rise and challenge the all-time high of $1920 reached in September 2011? Or will this rally fade? In order to make a call, we need to determine what is driving the price presently.Gold USD

Why do investors buy gold?

Investors buy gold for many reasons. It’s interesting to list these in order to examine which are prevalent in the minds of investors right now.

1. Over the long term gold has acted as a store of value.

2. It acts as a currency and large transactions are often denominated in gold.

3. Gold has been mined for centuries and stores of gold above ground are huge. Significant quantities of gold are held in central banks and movements of these reserves often depend on the economic fortunes of the relevant country. The flow of gold between countries or central banks is unpredictable and can disrupt the physical market.

4. Demand for jewelry, industrial fabrication and retail investment has exceeded newly mined supply for many years, but the deficit has been made up by sales of scrap gold, sales by central banks or hoarders of gold.

5. In recent years, significant amounts of physical gold have been purchased by both Chinese and Indian investors and consumers. There is significant demand for jewellery in these countries; in India gold chain is used as a store of value, for gifts at weddings and as an alternative currency. Both these countries have experienced high economic growth rates over many years and gold imports have risen steadily, in spite of restrictions on imports by India.

6. Gold is also seen as a defensive investment which is used to hedge against wars and other political events, natural disasters and economic recession. Interest rates are also a factor as these determine the holding cost of gold – an asset that pays no dividends.

7. To complicate matters even further, it is believed that the interaction between gold and other financial assets has led to the manipulation of the gold price. The perception is that when the price of gold is going up, then the value of other assets is likely to fall. Gold is relatively small when compared with the market capitalisation of global equity and bond markets. It’s a case of the tail wagging the dog. So if you control the tail, you control investor perceptions of the other assets. It is very difficult to prove manipulation, but many believe this goes on all the time.

Supply and Demand

Any of the above factors can influence the gold price at any time, but ultimately the price is determined by supply and demand. As supply and demand figures are published regularly, it would seem a fairly simple task to analyse the figures to see what has caused the gold price to move up or down. The most reliable figures are published by the World Gold Council. The Council is the market development organisation for the gold industry. It works across all parts of the industry from gold mining to investment and their aim is to stimulate and sustain demand for gold.

Unfortunately their figures have been criticised for being incomplete, inaccurate and not up-to-date. Any inaccuracies are not necessarily the Council’s fault as not all transactions are reported and Central Banks are not obliged to reveal their transactions or reserves. Consequently, commentators are left to analyse the figures as best they can to see which net changes are impacting the gold price.

Why has the price of gold recently increased?

So looking at the seven factors above, what has changed to cause the gold price to rise by about one-third in the 12 months to September 2019? The obvious answer is the trade war between the US and China. As indicated in point five above, China and India are the two counties that in recent years have imported the most gold. This factor, combined with the considerable uncertainty that the trade war has created as well as the perception that the war could continue for an extended period, has resulted in a large increase in gold imports into China. In the eight months to July 2019, according to the latest figures, China has imported 94 tons of gold, bringing its total reserves up to 1945 tons. Indian imports are reported to have slowed in the past year or so, but are still growing. Indian investors have always been very price sensitive. Investors in other countries are also likely to have increased purchases in these uncertain times and as a result of what one could call the “Trump” factor.

If one considers that global growth has been slowing, which would normally result in lower physical demand for gold, then the positive effect of the trade war on gold has probably been diluted. Nevertheless, the increase in the gold price does correspond with the timing of the escalation in the trade war, increasing tariffs and disruption of trade. Although there are many other contributing factors, it would appear that the swing factor in pushing up the gold price over the past 14 months has been the trade war.

If this conclusion is correct, then what will happen to gold when the trade war ends? I would suggest that this is already evident in the decline of about $110 in gold from early September to mid-November, which coincided with trade talks between the US and China.

What does the Gold-to-Silver ratio tell us?

Another gold price indicator monitored by investors is the Gold-to-Silver price ratio. This ratio is calculated by simply dividing the silver price into the gold price. The resultant ratio gives an indication as to which metal is cheap or expensive. Over the past 20 years, the ratio has fluctuated broadly between 45 and 85. So when the ratio is near the bottom of this range, it is indicating that gold is relatively cheap and silver is expensive. Conversely at the top of the range, gold is relatively expensive and silver is cheap. At the time of writing, with gold around $1465 and silver about $16.85 the ratio is 87. As this is a relative ratio, it is telling us that gold has risen faster than silver. Unfortunately the ratio cannot predict the next movement in the metal prices. It does indicate that a “spread trade” (long silver and short gold) could potentially yield a profit if the ratio declines over silver ratio

The ratio also indicates that gold could fall faster than silver if the trade war comes to an end. Investors should now be examining all the other factors listed above to see if gold will be supported by something else if the trade war ends. Factors like the US elections next November, the possible impeachment of Trump and future growth rates in China and India could come into play.

Disclaimer: The views thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.