The price of gold throughout the rest of this year is almost anyone’s guess, though more “analysts” now are starting to predict either a sideways or bear market than ever before. Of course, they’ve been wrong thousands of times over the last few decades, so we shouldn’t take their word for it — we should analyze the biggest factors for the market this year.
But first, we need to talk about a specific concept many investors get confused over. Just because something is a good asset to hold and is a great inflation hedge generally, doesn’t mean that it’s absolutely going to increase in value every time there’s inflation — if gold prices have gone up “too much”, and there’s no way to be certain where that line is, then inflation could keep happening even while gold stays flat or begins to drop.
Right now inflation is at roughly 8%, and yet the price has been flat since mid 2011. That’s just how the market works. Still, let’s look at the biggest factors in the market:
China and India. In 2011, both China and India had a huge role in driving up the price of gold, as the demand in both of these countries skyrocketed, especially in China. If something causes them to break off their purchases by a substantial amount (regulations, fickle markets, a new recession in their countries) this could trigger an end to the sideways market and a beginning of a bear market. That won’t be good for gold prices.
At the same time, if they don’t slow down their demand, this will be a huge influence, and mixed with any “demand” below, could keep prices increasing. I think 2012 is likely to see Chinese demand still far outstrip their supply of gold to the world — they’ll be net buyers. The only thing that could change this would be a massive Chinese correction.
Central Banks. This is similar to the above topic, because many emerging market central banks are buying gold. The Federal Reserve banking system isn’t buying gold of course, but they’re not exactly in emerging markets — they’re in an already developed economy. The Eurepean Central Bank has already substantially increased their holdings for 2012. If this trend keeps up, gold prices will keep up as well.
Iran and Oil. This is a huge one. Iran is waging all-out war against the dollar, trying to get gold to be the foundation of international oil trade. If they do this, then the dollar’s reserve status crashes, and there is a lot of money headed toward America — causing massive inflation.
Not only will this drive up the price of gold from foreign and investor demand, it’ll also create inflation-based demand in the US as well. If this happens the way Iran is trying, then this is a huge, huge impact on gold prices. That’s a big if, though.
Recession Fears. If recession fears die away and people are convinced prosperity has returned, they’ll be less fearful of a crash and less fearful of Fed meddling, which will greatly hurt gold prices. It’s literally that simple. That’s why gold prices dropped substantially last week — the Fed didn’t create new printing, so there was less inflation fear.
The Fed. Speaking of the above, there are two ways the Fed could hurt gold prices. The first is to not do QE3, though there’s no telling if they will or won’t. The second is to raise interest rates. If the Fed both raises interest rates this year as well as doesn’t do QE3, then gold prices will be kicked in the face.
These are the biggest factors in the gold market right now. There are other factors, but these are the trends we need to keep our eyes on. Overall, the price of gold looks great as long as Iran is waging war, the Fed is printing money, and China is gobbling up gold — but if that changes, it won’t look pretty.
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