In this article, we’ll review some of the biggest sources of supply and demand in the gold market today, with a discussion about the potential future or spot price of gold. First, let’s cover the upward pressures on gold prices.
Pressures for the Gold Rate to Increase:
- Central Banks Are Buying. We’ve discussed this quite a few times in the past. Demand for gold has been increasing for about a decade because central banks are still buying gold. This is one of the biggest influences in the price of gold overall. Note that this mostly includes emerging market banks like China and India. Central banks are believed to own about 15% of the gold in the world, meaning they’re a huge influence.
- Fear of Inflation. Gold isn’t a short-term inflation hedge so much as it is an inflation fear hedge. In other words, gold prices track fears of inflation in the short run. Over time, they beat inflation, but it could take years for everything to average out. If people are suddenly afraid of more inflation, expect a gold rate jump.
- Potential Gold Standard. Similar to the idea above, many people are expecting gold to make some sort of comeback in the way of money. There’s a lot of talk about how this will impact the price of gold, but many are betting that it will make gold prices skyrocket.
- Speculators Are Buying. This is probably the biggest influence to the gold rate. Speculators and investors are buying it up like crazy because they think other speculators and investors will buy it up so they think the price will increase. The problem is that speculators and investors essentially always overbuy during bull markets and oversell during bear markets. This means that the price of gold could suddenly drastically change directions — taking gold investors with it.
- Gold Mining Going Down. Gold mining is getting more and more difficult as we’re running out of places to find gold deposits. This will continue to get worse, and eventually we’ll have almost all the gold we’ll ever hold. That’s a huge price pressure upwards, over time at least.
- Gold Jewelry. This is an often-forgotten aspect of gold demand. A lot of gold is going to the creation of gold rings, gold necklaces, and other jewelry. This will likely always be a demand source. Gold is pretty and jewelers know this.
Next, let’s cover pressures pushing the rate of gold back down. Note that all of these pressures are generally going on at the same time and change every day, hence today’s gold rate being different compared to yesterday’s price.
Pressures for the Gold Rate to Drop:
A lot of these pressures — or fears about these pressures — are impacting the gold market. If they suddenly get incredibly strong, this could signal either a correction in gold rates or an all-out crash.
- Speculators Always Overreact. As explained above speculators essentially always overreact. That means that whenever the overall winds change, the price of gold could take a massive crash. Just look at any chart and you’ll see something similar happened in 1980.
- Central Banks Could Sell. If India and China suddenly shift gears, we could see a huge impact to gold markets, tying in with what was explained directly above.
- Prosperity Could Return. This is likely to happen over the next few years. In spite of our government’s attempts to destroy the economy, we’ll likely eventually overcome the recession and get back into “typical” prosperous times. If this happens without another crash or inflationary explosion (good chances for both of those, though), then the price of gold could suddenly either plummet or stop increasing as fast.
- Deflation is Always a Risk. A crash could also put at least a temporary handle on gold prices. Just look at 2008 — that was a good example of how people just flood to cash and not gold when stocks and everything begins to drop at the same time. Remember, gold is a long-term safe haven — not a short-term safe haven. Understanding this is the difference between profiting from the insanity or being led off a financial cliff.
To learn more about what is impacting the price of gold and how the gold market works, check out this article on why most gold forecasts get it wrong.