24Sep

GOLD PRICES HAVE BEEN PLUNGING; WHAT IS CAUSING IT?

When the world becomes filled with more uncertainty and markets become more volatile and geopolitical unrest is afoot, gold is considered a safe harbor.

During volatile markets of the recent past, many investors have been driven to gold by putting at least a portion of their portfolios into the precious metal. In the past, it was a safe haven during times of high inflation.

In the first half of August, the price of gold hit an 18-month low. That trend happened concurrently with the strengthening of the U.S. dollar.

A downtrend had begun in 2013, but saw some reversal in 2014 and the first half of 2015. After peaking in 2011, when there was more uncertainty in the economy, gold prices were volatile. Decisions by the Federal Reserve also impacted gold prices during this time. Quantitative easing, which was a fed initiative in reaction to the 2008/2009 financial crisis, was being “tapered” and things had turned a corner.

This year, gold has been down about 9 percent. Gold mining stocks have taken a hit as well. That trend only reversed in late August as the Federal Reserve made it clear that their plan for gradual rate increases would remain in place; no overheated economy. Gold is usually priced in dollars and as the Fed raises rates, more of the safe haven investments will find their way to treasuries.

Despite trade tensions, the actions of the Federal Reserve take precedent for most investors who look to gold.

By the end of August, the price had broke above the $1,200 dollar mark because of a weaker dollar. Prices were up 4 percent since hitting the year’s low in early August. That rally did not continue after a weekend though.

Less Reason to Rely on Gold

The reason for gold’s decline may not be so much that investors are losing interest in the precious metal as there are fewer reasons to seek a safe harbor. Many of the uncertain geopolitical events that spurred the sales of gold in the recent past, and increased its price, have fallen by the wayside.

The financial crisis that struck Greece, Spain and Portugal has been largely mitigated. Talks with North Korea have eased tensions on the Korean peninsula and the South China Sea. Also, the U.S. and Mexico came to an agreement on trade. The rally in the equities markets have attracted more of each investment dollar with less directed at a hedging strategy like gold.

There are also markets like cryptocurrencies that may be funneling off some of the investments normally allocated to gold.
Most of the world’s demand for gold comes from India and China. They are responsible for 45 percent of the world’s demand for gold jewelry and gold bars.

Going into the holidays, gold sales increase, and demand for the precious metal gets a slight jolt to the upside. Other than that, a flight to safety, and a volatile environment for equities, may be the only things to re-stimulate the big investments in the shiny stuff. Those things can always reemerge.


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