Gold Refiners Can Understand the Market but Not Predict It
The price of gold just hit a seven-year high, and businesses that buy or use gold have a vested interest in knowing where this trend is heading next. No gold refiner — or anyone else — can predict the precise movements of any commodity market. However, it is possible to make more intelligent decisions about your wealth if you understand the factors that drive the gold market.
The Price of Gold is Counter-Cyclical
The economy is often thought of as cyclical, meaning it varies between “good times” of high economic growth and “bad times” of low economic growth or even economic decline. The price of gold tends to rise during the “bad times”, when the value of other investments, such as stocks and real property, goes down. The price of gold tends to rise during the “bad times”, when the value of other investments, such as stocks and real property, goes down. For example, the price of gold went above $2,000 per ounce during the 2008 financial crisis (keeping gold refiners very busy!) when stocks and other investment markets were in decline. Gold—unlike stock in a business—is perceived as having an intrinsic value that cannot be taken away in bad economic circumstances that might cause a firm to fail. Gold is often used as a hedge against other investment losses, and in a turbulent business environment the safety that gold can provide is in demand. Once we understand this dynamic, we have a window to understanding why gold is suddenly trading at a seven-year high.
Pandemics, Elections, and Illicit Sovereign Sell Offs: Some of the Factors this Gold Refiner Sees As Influencing the Price of Gold
The Coronavirus is Causing Global Financial Uncertainty: The recent outbreak of coronavirus, a respiratory disease that emerged out of Wuhan, China, has left global markets in a state of extreme uncertainty. The virus has claimed more than 2,000 lives, the vast majority of which have been in China. Scientists have recently learned that the disease can be transmitted by people who have not been feeling symptomatic, which could make the outbreak harder to control. The U.S. Center for Disease Control warns that “Public health and healthcare systems may become overloaded, with elevated rates of hospitalizations and deaths”. The disease will take an economic toll as well as a human one. For example, an uncontrollable epidemic could lead to restrictions on travel, which could negatively impact tourism, shipping, and complex chains of supply. With infections appearing in a number of countries, the Dow experienced a 1,900 point drop over two days.
The Market Fears that the Economy will Decline After the Election: The current U.S. Administration has been more outspoken than any prior U.S. government at trying to influence the actions of the Federal Reserve, the primary U.S. government body managing the economy. “The Fed” had been seen by previous administrations as an independent, technocratic body that should not be directly controlled by politicians. However, its actions can have a huge impact on election results, because voters tend to favor the incumbent when the economy is doing well. Donald Trump’s government is perceived as using every economic lever at its disposal to keep the economy going strong until the November presidential election, after which the economy could plummet, as such a course would not be sustainable forever.
The Venezuelan Sovereign Sell Off to Unscrupulous Gold Refiners May be Ending: Internal political tensions in Venezuela became so hot that in 2019 the head of the legislature, Juan Guaiado, declared himself Acting President, in direct opposition to President Nicolas Maduro. During the ensuing struggle for control, the Maduro government sold off much of the country’s sovereign gold reserves to fund its efforts to remain in power. Since U.S. and other sanctions made the gold largely untradeable on the financial markets, they are believed to have used gold refiners in places such as Uganda and Turkey in an effort to launder the material. This flooding of the gold market may have artificially held down the gold price during much of 2019. Although these actions are below-board and it is difficult to discern their precise contours, the sell-off may be ending.
How Long Can the Price of Gold Stay So High?
Understanding the factors that led to gold’s strong recent performance can provide a lens for efforts to predict how long the prices will last. If the coronavirus panic ultimately subsides, gold could start trading at lower prices. There are significant reasons to think that the first factor—the coronavirus—may soon run its course. The pandemic appears to have peaked in China, its original hotspot, according to the World Health Organization. And although it has spread to some Western countries through travel, the harm to people appears to be less in countries with more advanced health systems. Remember SARS outbreak in 2003, and Avian Flu from 2013? These feared pandemics caused some human misery, but fears of civilization-altering epidemics turned out to be overblown. The same could well be true for the current coronavirus outbreak, as professional epidemiologists from around the world bring their expertise to bear in countering the disease. If the coronavirus panic ultimately subsides, gold could start trading at lower prices.
This Gold Refiner Thinks the Best Prediction May Be No Prediction at All!
Every market price represents the equilibrium between those who think the commodity should be valued higher, and those who think it should be lower. By understanding some of the factors at work, we can appreciate the complex dynamics and layers of uncertainty that undergird any given price. The best way to approach uncertainty may be a balanced set of investments, with counter-cyclical assets like gold balancing traditional investments like stock index funds and bonds. Businesses, such as pawn brokers, that buy gold from the public risk making very strong bets on the price of gold as they accumulate inventory. But what if the market goes down right when you need to turn your gold into cash? If you feel like your gold inventory may put you at risk if the market fluctuates, call Pease & Curren at 800-343-0906. We can help you begin the process of diversifying your precious metal holdings.
About the Author
Before becoming a gold refiner, Frank Curren attended Georgetown Law and worked for a non-profit focusing on financial services litigation.