When the gold bull market comes, how can we seize such investment opportunities? What kind of breed is worth paying attention to? In general, gold has three major attributes. First, it has commodity attributes like ordinary metals, and besides it also has currency attributes and financial attributes. This article will analyze the influencing factors of gold price one by one from the three perspectives of long, medium and short-term, while analyzing the investment opportunities of gold requires comprehensive consideration of the impact of different factors.
Long-term factors affecting the price of gold
From a long-term perspective, the factors affecting the price of gold mainly include the US dollar index and US dollar interest rates. Based on its monetary function, gold is related to the value and purchasing power of the US dollar.
Although the collapse of the Bretton Woods system has decoupled gold from the currencies of various countries, the role of gold as a currency is deeply rooted in the hearts of the people, and governments of all countries still regard gold as an important reserve. Therefore, after the “Jamaica Agreement” was signed, the U.S. dollar and gold had a mutual substitution relationship, and the two traded each other. The price fluctuations of gold are mainly affected by the US dollar interest rate and the US dollar index. The US dollar interest rate reflects the domestic economic operation of the United States, and the US dollar index is an indicator of the relative strength of the domestic and foreign economies under the background of economic globalization. These two indicators constitute the valuation center of the gold price.
From the perspective of the elongation cycle, the gold price and the US dollar index have an obvious negative correlation . Since the collapse of the Bretton Woods system, the correlation coefficient between the two is -0.48.
The Fed’s monetary policy always affects global nerves. The Fed’s interest rate cuts generally send two major signals to the market: first, the US economy is in recession; second, the US inflation is less than expected.
We know that real interest rate = nominal interest rate-inflation rate. A reduction in interest rates will cause the nominal interest rate to fall rapidly in the short term, while the inflation rate is a long-term indicator with little short-term fluctuations, so the real interest rate will also fall rapidly, thereby boosting risk assets and gold The price.
Medium-term factors affecting gold prices
From a medium-term perspective, an important factor affecting gold prices is the relationship between supply and demand.
From the perspective of the supply side, the current surface stock of gold is about 200,000 tons, but due to the mining cost, the annual supply increase is relatively flat. The compound growth rate of gold production from 2008 to 2017 was 2.6%, while the growth rate in 2018 was 0.9%. In 2019, it fell by 1% year-on-year, which is a very obvious downward trend. Affected by the impact of the epidemic, the output of major gold-producing countries has seen a significant decline in 2020. It is expected that the gold supply or production volume will gradually decrease in the future.
From the demand side, global demand changes mainly come from official reserves and private investment. Since 2008, global central banks have continued to increase their gold holdings from a total of 30,000 tons to nearly 35,000 tons (as of May 2020). In the private investment sector, as the gold ETF market has become more active, investors’ attention has also increased, which has expanded the demand for physical gold . As of May 2020, the global gold ETF holdings are as high as 3,510 tons, and they are still showing an accelerating growth trend.
Short-term factors affecting the price of gold
In the short term, the price of gold will be affected by risk events and liquidity factors.
The main reason for short-term events to stimulate gold is the suddenness of risk events. The corresponding risk assets and national exchange rate will fluctuate greatly, which will cause the depreciation of banknotes endorsed by national credit rising, this mainly corresponds to the safe-haven properties of gold. Looking back at history, the oil crisis in the 1970s directly raised the inflation rate in the United States and also impacted Japan’s economic growth momentum, such as the Reagan Administration’s Iran Gate incident in the 1980s, the Asian financial turmoil in the late 1990s, and the early 21st century. The 9/11 incident, the 2008 US subprime mortgage crisis, the European debt crisis after entering the decade, Brexit, trade friction, the US-Iran conflict, the Iranian nuclear crisis, the new crown epidemic, etc., have all produced short-term significant gold investment opportunities.
Liquidity is a common factor affecting asset prices. When the global large-scale spread of money causes liquidity to overflow , the rapid increase in excess funds chasing limited assets will cause most assets to rise. Compared with the rapid growth of the money supply, the supply of gold is extremely stable, which has greatly pushed up the price of gold.
How should ordinary people invest in gold?
There are three main types of gold investment targets physical gold and related investment products, gold futures and gold stocks. For ordinary investors, we only briefly introduce physical gold and related investment products and gold stocks.
Among the physical gold, an important type of investment product is the gold ETF. The gold ETF is equivalent to spot gold. It provides investors with the opportunity to buy gold in the smallest unit (1g of gold) and Good liquidity. Although gold cannot generate interest, physical gold ETFs can obtain additional income through the gold leasing business.
Of course, gold stocks are more flexible than physical gold. This is not only reflected in the rising gold price, but also when the gold price is falling. From August 2011 to November 2015, London Gold fell 42%.
In summary, physical gold is more suitable for investors with lower risk tolerance, while gold stocks are more suitable for investors with higher risk tolerance.