Last Updated on Mar 25, 2020 by James W
An article on The Binary Advisor says that gold is currently at its lowest price since 1996, but that it may rally itself by the 4th quarter of this year. So is now a good time to invest in gold?
Gold has a strong historical tradition as a currency backer. While it does not have the importance that the gold standard had until 1971, it is considered a stable investment because of its inelastic price.
On July 20th, that perception was challenged. Simultaneously in New York and Shanghai, 57 tons of gold entered the market, abruptly dropping the price of gold to $1,086 an ounce. This low price has investors assessing whether the lure of low-priced gold will grant them good returns by the end of the year. The two conditions most likely to affect gold price this year are central bank demand, and the state of the American economy.
Central Bank Demand
The strongest markets of gold are national and federal central banks. Gold and the dollars are the defense against the depreciation of national currencies. Nations have also been moving away from the dollar since the 2008-2009 financial crisis. The steady demand of moving from the dollar means steady gold prices.
The central banks of Russia and China are the markets under scrutiny in 2015. Russia, especially, is emerging as a new contender as oil prices remain low and their issues with Ukraine continue. The economic sanctions from the US and the EU have lowered the Russian ruble dangerously enough that it needs a gold stockpile to back it.
China has proved the biggest shock to gold-suppliers by declaring a 600 ton increase in gold reserves from 2009 until 2015. Since the volume was lower than expected, gold demand stayed relatively low, as did gold prices. China has also begun to sell gold to stabilize its currency as its stock prices fluctuate, lowering prices as the supply increases relative to demand.
The American Economic Situation
Gold prices are highest in a contractionaryeconomy, when perception of gold stability raises demand. Following the 2008-2009 financial crisis, gold prices stayed relatively high until 2011. Relative economic stability then lowered the gold prices steadily and created a ‘gold rush’, incrementing sales in the US alone by a 151% rise.
However, at the moment, gold has reached its lowest point in five years, down 40 percent since 2011. Stock prices are also high, making stocks a more attractive target for investors looking for short-term returns.
The most significant upcoming event that could alter the price of gold this year is the announcement by the Federal Reserve, that it will lift the emergency restrictions in place since the 2008-2009 crisis, and raise interest rates. With over half a million jobs created in May and June alone, the economy is judged healthy enough.
With this strategy, savings will increase, and the higher margin of return will encourage dollars to flow to the banks rather than to gold. This will keep demand and therefore prices low for the rest of the year.
Is Now a Good Time to Invest in Gold?
Looking at central bank demand and the prospects of the American economy, it does not seem likely. Investment for the long term may be an option, but if the idea is to buy now and sell in the 4th quarter, it does not seem likely that gold prices will rally in time for worthwhile returns.
