Bearish factors that affect gold prices?

Dear readers,

In the earlier post, I have shared with you the bullish price factors that affect the price of gold. Now let me share with you, some bearish price factors that could affect the price of gold.

  1. Selling by central banks
    During the debt crisis involving South American and Latin American countries back in 1982, the gold market became deeply depressed because of sales of gold by banks who were liquidating their gold reserves to get dollars to alleviate their debt problems. When countries sell gold to get dollars or any other currency, the gold price declines.
  2. Selling action by investors
    The gold price dropped from a $200 level in January 1975 to slightly above $100 an ounce in August 1976. Much of the pressure on the gold price during that period came from American investors who had entered the market in January 1975 and acquired gold legally, after a drought of more than 40 years, believing people like James Dines, the gold guru who predicted in November 1974 that gold would go to $500 an ounce by the end of 1975. But as those investors and dealers who had positioned physical gold in anticipation of a real price rise saw the gold price dropping, they added pressure to the decline by dumping their gold. Actually, it took visions of the possibility of a Democratic victory in the fall of 1976 to turn the gold market around; because a cliché of politics in America has ever been that Democrats are ‘spendthrifts’ and the Republicans are ‘misers’. After almost 8 years of a Republican administration, accompanied by a gold price rise instead of a drop, Americans might possibly flock back to gold. After all it was Thomas Paine who noted in 1776, ‘What we obtain too cheaply/we esteem too lightly/’Tis dearness only that gives everything its value…’
  3. Falling inflation rates
    As the United States entered into the last year of the Carter Presidency (1980) the rate of inflation in America hovered around 14 percent. The gold price that year on a daily average stood in excess of $600 an ounce – its highest daily average level ever. After President Reagan took the oath in January 1981, the ‘official’ inflation rate began to fall. And so did the daily average gold price. Gold price and inflation rate have been inextricably locked together since the metal has been permitted to trade freely in world markets. Perhaps one of the reasons that the gold price doesn’t collapse in the face of the ‘official’ (low) inflation rate is the belief people feel about the supermarkets, where the price of bread, sugar and other products is seen as high and rising. But if inflation really declined, chances are the gold price would drop.
  4. Decreased use of gold in asset allocation
    Often the tax atmosphere of a country causes its citizens to avoid gold or gold-price related items as assets in a portfolio. For example, when taxes on income are reduced drastically as they have been the past few years in the United States (from a peak of 50 percent to 28 percent) investors might seek income rather than gains – especially if such gains involve taking risks. Therefore, decreased investment interest in gold as a viable asset could put pressure on the future gold price.
  5. Increase in interest rates
    Under normal conditions, any increase in interest rates heralds a decrease in the price of stocks and bonds, as well as gold. When Mr Volcker (then chairman of the Federal Reserve board) railed publicly about bank loans to speculators who were carrying gold and silver via loans at Federal Reserve banks in March 1980, and the Federal Reserve Bank raised the discount rate to an all-time high of 15.5 percent in the middle of the month, the prime rate leaped to 20 percent. This turned out to be the lethal weapon that broke the precious metal markets in a single week. What is significant is that a real rise in interest rates can cause a real fall in the gold price.
  6. Increase in dollar value against other currencies
    A strong dollar is a herald of a future falling gold price. One of the reasons for the switching of dollars into gold by Arab oil interests during the OPEC run-up of 1973 to 1979 entailed the converting of paper that was declining in purchasing power into gold that was gaining in price. That is why, should the dollar for some unknown reason recover against the stronger currencies, holders of gold may dump their metal to switch back into dollars.
  7. Decrease in the anxiety factor
    Should internal conditions indicate that the economies of the free world are improving, that the threat of war between market economy countries and managed economy countries is vanishing, then the anxiety factor may possibly decline. Certainly recent improvements in international relationships between America, China and the USSR are indicative of items which could lower the anxiety index. The lowering of the cost of living (rent, food, petrol, a movie or sports event ticket) would not only lessen the anxiety factor among Americans, it could also help drop the gold price in the market place.
  8. Expansion of South African production
    Despite its seemingly ever growing political problems, South Africa’s gold mining companies, just like gold miners everywhere else, are encouraged by the current level of the gold price in dollars and are constantly improving both their production methods and reclamation methods to benefit from recent mining technology and increase annual gold output. Since the grades coming from existing mines vary, it has always been the policy of South African mines to produce low grade ore in times of rising prices and resort to higher grade ore when prices decline. Moreover, since the South African Chamber of Mines has always provided funds for research in every area involving gold mining, that research has paid off in innovations involving exploration and mine development, and in extraction methods of winning the maximum gold from the ore at hand. Since a mine is a dying business (once ore is removed it cannot be replaced) South African mining companies are constantly searching for new and promising gold properties to develop. In the interim, many of them, such as Gold Fields of South Africa, Rand Mines, etc., have developed promising platinum mines to add to their annual profits. But if the annual tonnage, which has been in the neighborhood of 600 tonnes of gold per year increases significantly in future, that extra increase may put pressure on the going gold price.
  9. Increased Soviet gold sales
    Like the South African mines, the mines in the USSR have increased annual production rather significantly. Formerly, much of the Soviet output rose from placer mining (gold obtained from river beds). But more than 20 years ago in Siberia, an area called Murantau came into production; and according to reliable sources, has produced more than 140 tonnes of gold a year. In addition, other areas of the USSR have contributed to what the experts now agree, amounts over 300 tonnes a year of Soviet gold production. Evidently if Soviet sales reach that figure or higher, like they did in 1986 and 1987, the result could put downside pressure on the gold price.
  10. Decreased speculation by gold future shorts
    If speculation by short-sellers who are not trade related decrease, then the need of said risk-takers to buy gold futures contracts to cover diminishes – and in the process, one of the props to the gold price also weakens.
  11. Decreased speculation by gold future longs
    If speculators who are not trade related stay away from the gold futures arenas, the targets of the hedgers who have to shift their risks via short selling have left the field and only professionals remain. In this instance, the gold price in the pits will sag, since traders go to lunch when there is no significant public participation in the risk-shifting process
  12. Decreased industrial consumption
    Since the bulk of industrial gold usage in fabrication involves gold jewellery and bullion coin minting, a fall-off in buying of those objects occasioned either by economic circumstances or investor preference could affect the gold price adversely. Despite the fact that all the gold that comes out from the ground each year is looked after, unless there is a sustained level of gold purchase comparable to previous years, the gold price could decrease.
  13. Decreased gold promotion
    Ever since the purchase of gold coins and gold jewellery began to be scientifically promoted by Intergold in 1971, public interest in gold as a thing of beauty and value has increased all over the world. With the advent of the World Gold Council in 1986, and its success in promoting interest in gold in 1987, decreased gold promotion seems unlikely at this writing. But if for some unforeseen reason gold promotion levels decline substantially, it follows that the gold price could decline.

With the bullish and bearish price factors in mind, its time that you should be aware of news that could have an impact these price factors.

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