Bullish factors that affect gold prices?

Dear readers,

Last Thursday, I shared with you the awesome news about me buying my first piece of physical gold. The reason why I’m investing in commodities (purely in gold) is because I feel that the stock market is too “hot” for investments to be made. It is my personal preference not to invest in funds.

Today, let me share with you the price factors that make the price of gold to increase.

  1. Buying action by central banks
    From 1982 through 1985, central banks were net buyers of some 500 tonnes. This helped lift the gold price from its near-term nadir of slightly under $300 an ounce to nearly $400. Central banks, the International Monetary Fund (IMF), Bank for International Settlements (BIS) and the European Fund for Currency Policy Cooperation hold about 36,000 tonnes of gold. Realising that in 1986 the total amount of gold produced and old gold recycled that year amounted to 1900 tones, it becomes evident that central banks and agencies are currently the largest investment holders of gold. So when they add to their reserves, their buying is a bullish influence.
  2. Buying action by investors
    Buying interest by investors in bullion coins and small bars generally buoys the gold price. For example, when the American Eagle was launched, investors in 1986 and 1987 purchased coins for their individual retirement accounts (IRAs) – a US tax-sheltered ploy – or other investment objectives, and the gold market received upward impetus. The roaring price rise in gold from the $500 level at end of December 1979 to a high of $850 a few weeks later also was abetted by frantic investor buying of small gold objects.
  3. Rising inflation indices
    Rises in the commodity Price Index (CPI), Producer Price Index (PPI) and all the other economic yardsticks that track inflation will always exert upward pressure on the gold price. In fact, at the time the inflation rate was the highest in American history (at the end of 1979), the gold price was also on its way to the highest price in history.
  4. Increased use of gold in asset allocation
    Modern portfolio theory dictates that informed, sophisticated investors and their advisers carefully weigh alternatives for assets in any particular investment climate. In the rather rare cases where investment fund managers can look beyond interest and dividend return into the dark forest of monetary debasement followed by hyperinflation, a small percentage (say 5-10 percent) will be allocated to precious metals, mainly gold. So if only 5 percent of the invested assets already owned by Americans were shifted into some form of gold investment, some forecasters believe gold would rise to $3,000 an ounce. Assuredly any shift of funds from paper assets to hard assets will boost the gold price significantly.
  5. Decrease in interest rates
    Gold in physical form ties up capital which could yield annual monetary rewards in the form of dividends and interest to investors. If interest rates are decreased, the physical gold costs less to ‘carry’. Lower interest rates, in turn, make more money available, thus generating – according to economists – inflation. If the discount rate were substantially lowered by the Federal Reserve Board, for example, this would influence inflation upwards. And the gold price would rise.
  6. Decrease in dollar-value to other currencies
    A weak dollar has already demonstrated its upward influence on the gold price. Back in 1981, where gold briefly reached $600 an ounce, the Japanese had little interest in buying that metal for investment, since the yen traded over 250 to the dollar. In 1986, with a gold price of about $300 and a yen surging against the dollar, on its way towards 150, the Japanese considered gold a big bargain, as they still do with the yen at under 130 at that time. In like manner, the decrease in dollar value against the increase in value of the Swiss franc and the Deutschmark during those years has also made gold more attractive to foreign buyers, since it is quoted in dollars. The resulting corollary is that if the dollar drops, gold rises.
  7. Increase in the anxiety factor
    During the many debasement of past centuries, people all over the world have developed an ‘anxiety factor’. Worried that something is going to happen to their money, virtually every family on the Continent has been the beneficiary of gold, from ancestors who foresaw the sensibility of hoarding small amounts of Thalers, Soverigns, Napoleons, Kroners, etc., to protect themselves from the future. War, inflation, depression, have all added to the anxieties of investors on a worldwide basis. An increase in the anxiety factor translates itself into an increase in the gold price.
  8. Closure of South African gold mines
    Because about half of the annual newly mined gold supply comes from South Africa, there is the perception that if its mines closed down because of strikes or political problems, there would be concomitant shortages of gold in the physical market place accompanied by a short-term rise in the price of gold. This line of thinking might turn out to be true, should such an unlikely event ever occur.
  9. Decreased Soviet gold sales to the West
    The USSR in the past few years has supplied the gold market of the world with more than 300 tonnes a year through export sales. Since the USSR does need a certain amount of hard currency to deal with the free world it seemed logical that gold sales from the USSR to the West would continue at a high level. But recent detene between the USSR and the USA, for example, may lead to generation of hard currency for the Russians from other sources and other exports so that their annual gold sales might decrease substantially. If this occurs, that decrease will add to the bullishness of the future gold price.
  10. Increased speculations by shorts in gold futures
    As explained previously, holders of short futures contracts, who are speculators, will have to liquidate those contracts prior to the onset of the spot or delivery month. Since the shorts – if they do not have the gold to deliver – offset their risks by buying gold futures contracts of the same month they are short, such actions will instantly uplift the short-term paper gold market. When it comes to the gold price, the paper market, when it open, rules the price level. In March 1985, for example, the spot month price rose $35 in 15 minutes when shorts who were in trouble had to try to cover by buying gold contracts.
  11. Increased speculation by longs in gold futures
    Not so oddly, the trade sources that rise to the occasion to accommodate shorts who have to cover, also will become sellers of futures contracts to accommodate bullishly oriented speculators who hunger to go on long on gold contracts. The buying pressure of the speculators who seek long contracts cause the professionals to scale up their accommodating short sales, in turn causing the price to rise. Suffice to say, if there is a persistent presence of speculators who want to keep buying gold futures, the price of gold everywhere will rise.
  12. Increased industrial consumption
    While evidence of increased gold demand for industrial purposes has been held to be a rather weak bullish influence on the gold price, should the annual gold fundamentals reflect substantial increases in these areas, they can exert a positive influence on the gold price.
  13. Increased gold promotion
    It has been held that at least $100 worth of current gold price (about $450) arises from gold promotions. Public perception and awareness in both old and new consumer markets has been sustained – and possibly inflamed – by the promotional efforts of the World Gold Council, who last year reportedly spent about $100 million to promote gold products. With much of the gold promotion planned to interest areas of emerging capitalism, such as China, and areas of evident wealth from Brunei to Singapore, any escalation of gold promotion will help keep the gold price high – if not higher.

Now that you have a fundamental knowledge about the factors that affect gold prices, time to study the economy and judge for yourself, whether it is worth investing in gold.

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