What Drives the Price of Gold?

For the last two years, the world encountered an unprecedented shock. The uncompromising coronavirus altered most countries’ economies and affected nearly every industry, changing the way we conduct business and live our lives.

Against this backdrop, these past couple years have been a rollercoaster for price of gold. Triggered by governments’ and economies’ attempt at regaining what was lost, gold hit a record high price of $2,067.15 in August of 2020. Investors played their part by flocking to the yellow metal as a safe-haven investment during the economic standstill.

Expansionary monetary and accommodative fiscal policies were created by Central Banks, speeding up the current that flows money to this asset class. However in the first half of 2021, gold dropped by 6.6%, as gains during most of Q2 were thwarted by significant pullback in June. Gold’s performance in 2021 was driven primarily by higher interest rates – especially because of a more hawkish-than-expected statement by the US Federal Reserve. Gold was also influenced by upbeat investor sentiment as the global economy started to recover from the bludgeon of COVID-19.

Clearly there is a correlation between various macroeconomic factors and the price of gold. But in what way exactly do these factors drive the price of gold? To better understand the dynamics between gold and these macroeconomic factors:

  • economic uncertainty
  • interest rate decisions
  • economic growth
  • inflation
  • strength of the U.S. dollar

let’s dive deeper into what these factors are and how they relate to gold’s vacillating value.

Economic Uncertainty

During events of economic uncertainty, many invest in gold because of its enduring value, its ability to act as a hedge against market chaos such as

  • currency devaluations
  • political instability

Gold can act as a “safe haven” for investors in unstable arenas because its price can increase while expected returns on bonds, equities, and/or real estate may implode. The world witnessed this happen during COVID-19 when many investors demanded physical gold bars and coins to cater to their economic concerns, which pushed prices higher. Economists and investors alike took note as the virus amplified the inverse relationship gold shares with the U.S. financial system and its almighty dollar.

Value of the US Dollar

Gold prices rose not only because of the pandemic’s (temporary or permanent) closure of many American businesses, but also because of the government’s role as savior. The Federal Reserve’s dire printing efforts to supply stimulus checks and coronavirus relief packages weakened the U.S. dollar, which contributed to the rise in gold prices. Most dollar denominated metals, gold included, are inversely related to the U.S. dollar.

The U.S. dollar is powerful only because there is an entire planet full of competing currencies, a power gold capitalizes on. When the dollar rises in value, it makes gold more expensive for foreign buyers and could potentially cause declines in gold price. On the other hand, a weaker dollar may potentially make gold relatively less expensive for foreign investors, and can potentially cause spot gold prices to rise.

Monetary and Fiscal Policy

Intertwined into the value of the dollar is the (current and expected) path of monetary policy and U.S. interest rates. While no one governing body controls the price of gold, the US financial sector has a large stake in the claim.

The FOMC, The Federal Open Market Committee, holds meetings every six weeks to debate the future of U.S. fiscal policy. After their June meeting, the Federal Reserve projected two interest rate spikes by the end of the year 2023, instigating a week-long decline in gold prices, the metal’s worst weekly performance in 15 months. Although two years is a long time, whispers that the Fed intends on raising interest rates sooner than expected indicates the U.S. dollar may be strengthened, which will likely weaken gold prices.

The relationship between interest rates and gold prices are held together by the glue that is opportunity cost. A rise in interest rates and the value of the dollar weighs on the gold price while higher inflation, lower interest rates and a weaker dollar provide support for the price of gold. Gold usually benefits during periods of low interest rates, as low rates make the opportunity cost of holding gold less. On the other hand, gold may potentially come under pressure as interest rates rise, due to the fact that gold does not offer any dividend or interest for holding it.

Economic Data

Key economic data is another important macro driver influencing the price of gold, especially that of the U.S. as it is the largest economy in the world and agreed to be the most important barometer for global economic stance. Economic data, such as:

  • job reports
  • wage data
  • manufacturing data
  • GDP growth

influence the Federal Reserve's monetary policy decisions, which in turn affect gold prices. A stronger US economy,

  • low unemployment
  • job growth
  • manufacturing expansion
  • GDP growth over 2%

has a tendency to push gold prices lower. Strong economic growth implies that the Fed could make a move to tighten monetary policy, thus impacting the opportunity cost dynamic discussed above. On the flip side,

  • weaker job growth
  • rising unemployment
  • weakening manufacturing data
  • subpar GDP growth

can create a dovish Fed scenario on interest rates and increase gold prices. Because of the economic renaissance catalyzed by the COVID-19 vaccine rollout, the first half of 2021 has seen gold prices pull-back from their all-time highs in 2020.

Inflation

The rising price of goods and services also plays its hand at impacting gold. Sharing a positive correlation, higher levels of inflation often push gold prices higher, whereas deflation weighs on gold’s value.

Inflation is mostly a sign of economic growth and expansion. When the economy is growing and expanding, it's common for the Federal Reserve to expand their money supply. Expanding the money supply dilutes the value of each existing monetary note in circulation, making it more expensive to buy assets that are a perceived store of value, such as gold. This is why quantitative easing programs (like we saw following the COVID-19 outbreak) that noticed the monetary supply expand rapidly were viewed as such as positive for physical gold prices.

Key Takeaways

The pandemic itself in conjunction with post-pandemic recovery contributions have fluctuated the price of gold. It is clear that gold responds to various macroeconomic factors as it gains in value during times of volatility and falls in a risk-on environment when the global economy is performing well.

It is anticipated that the global economy will still continue to go through different stages of the economic recovery cycle but still with much uncertainty regarding the timing and scope.

The slower-than-planned vaccine rollouts, continued Covid fears, combined with fragile economic growth outlooks are culminating Central Banks around the world to decide on continuation of the low interest rate environment which could benefit the price of gold.

Within this continued environment of uncertainty, investors are continuing to seek to:

  • diversify their portfolios to utilize gold as a safe haven asset class
  • to hedge against potential adverse market corrections
  • and to protect themselves from the uncertainty the future holds.

Conclusion

It seems counterproductive to argue that economic uncertainty is the strongest leg to stand on when preparing for the future. However if the pandemic taught us anything, it is to prepare to be unprepared. Uncertainties still lie within new COVID outbreaks caused by evolving variants and steadfast nonbelievers. Investing in gold is more attractive now more than ever because it is a measure of protection for your wealth. Although the anti-vaxxers and anti-maskers may not agree, the overwhelming global opinion seems to be:

more protection is better than less.

The good news, however, is that COVID-19 left a lull in the market ready to be filled with eager investors. Given the current rapid changes in global climate combined with more figurative changes in the geopolitical and economic climates, now is the optimal time to invest not just in gold, but in a company that speaks gold’s language. Coinful Capital is such a company.

As the pandemic began in 2020, Coinful Capital’s Pierce 50 strategy has shown robust performance despite global market uncertainties.  As future economic recovery continues to remain uncertain, we believe we can continue to create value to our Pierce 50 investors.

For more information about the article, or about Coinful Capital, please get in touch with us at info@coinful.capital.

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Please read this notice carefully and agree below to gain access to our website. This notice relates to our terms of use and privacy policy which we encourage you to please read fully.

Only certain eligible persons are allowed to invest in the funds described herein this website and may only be marketed to certain sophisticated investors (essentially someone who is regulated by a recognised regulatory authority, or whose shares are listed on a recognised securities exchange, is a high net worth investor or who is reasonably to be regarded as being capable of evaluating the merits of the proposed transaction and invests at least US$100,000 or its equivalent). If you are not a sophisticated investor please select ‘I Disagree’ at the bottom of this page.

The information contained in this website is for information purposes only, and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws. It does not constitute a recommendation or takes into account the particular investment objectives, financial conditions, or needs of specific investors. Coinful Capital Fund SPC does not provide investment, tax, accounting, or legal advice to investors, and all investors are advised to consult with their investment, tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this website has been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. Any information with respect to price and value of the investments referred to in this website and the income from such investments may fluctuate and investors may realize losses on these investments including a loss of principal. Past performance is not indicative or a guarantee of future performance.

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The funds or portfolios described in this website (each, a “fund”) may not be subject to the same regulatory requirements as mutual funds in your jurisdiction, including mutual fund requirements to provide certain periodic and standardized  pricing and valuation information to investors. There are substantial risks in investing in a fund. Persons interested in investing in a fund should carefully note the following:

  1. A fund represents a speculative investment and involves a high degree of risk. An investor could lose all or a substantial portion of his/her investment. Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment in a fund.
  2. An investment in a fund should be discretionary capital set aside strictly for speculative purposes.
  3. The investment manager of a fund may have certain discretionary authority over the fund’s assets.
  4. An investment in a fund is not suitable or desirable for all investors. Only certain persons meeting certain eligibility criteria may invest in a fund. You must be a sophisticated investor (essentially someone who is regulated by a recognised regulatory authority, or whose shares are listed on a recognised securities exchange, is a high net worth investor or who is reasonably to be regarded as being capable of evaluating the merits of the proposed transaction and invests at least US$100,000 or its equivalent).
  5. A fund may invest in a limited number of securities or instruments, which could result in a limited degree of diversification and higher risk.
  6. A fund may employ certain investment techniques, such as leverage and other investment techniques which may result in increased volatility of the fund’s performance and increased risk of loss.
  7. A fund generally involves a complex tax structure, which should be reviewed carefully. A fund’s investment strategy may cause delays in important tax information being sent to investors.
  8. A fund may trade in commodities, futures and other derivatives, which may increase the risk of loss of the fund. Fund investments are to be considered illiquid and there are generally significant restrictions on transferring interests in a fund. There will likely be no secondary market for the interests in a fund.
  1. The fees of a fund’s investment manager may be substantial in some cases regardless of whether the fund has a positive return, and may offset the fund’s profits.
  2. A fund may have limited or no operating history.
  3. A fund may not be required by regulators to provide periodic pricing or valuation information to investors.
  4. There are likely to be a number of conflicts of interest or potential conflicts of interest in connection with an investment manager’s management of fund assets.

The above summary is not a complete list of the risks and other important disclosures involved in investing in funds. Before making any investment in a fund, investors are advised to thoroughly and carefully review the offering documentation with their financial, legal and tax advisors to determine whether an investment is suitable.

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