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Six Situations Boosting Gold Prices

It may have caught your attention that Gold is again attracting a lot of attention.  Gold prices rose to a six-year high, rising rise past $1,400 an ounce in the week ended June 21st.

What is driving gold prices?  Let's take a look at six situations that are boosting gold prices now:  

  1. Lower interest rates: the yield on US Treasury notes has dropped and The US Federal Reserve has signalled if the economic outlook weakens, they are ready to cut interest rates this year.  Gold gained in price after the June Fed meeting where the central bank held rates steady but spoke of “uncertainties” over the U.S. economic outlook.  The European Central Bank has also signalled that they expect lower interest rates.  Lower interest rates typically lead to higher gold prices.  
  2. Weakness in US$:  If US interest rates are lower, and  US  trade tensions slow global economic growth, it could mean less demand for US stocks or US currency, and typically a weaker US$ means stronger gold prices, as investors seek ways to maintain their purchasing power.  Many of the world’s major currencies have lost purchasing power against gold in the last decade.  
  3. Geopolitical Tensions:  US/China trade tensions, as well as US/Iran discussions, and Brexit uncertainty have had investors turn to gold, seen as a safe haven in times of political and economic uncertainty.  The prospect of  the two largest economies, China and the US, engaging in a tit-for-tat tariff standoff has already started to cool global growth.
  4. Investors Nervous:  With equity markets trending up for over eight years, and an inverted yield curve and fears of a global slowdown or recession, some investors are adding gold to counter balance stock market risk.
  5. Increased Demand:  Emerging markets have increased their purchasing of gold, both consumers buying gold jewellery.   The Chinese government encourages its citizens to put 5 percent of their savings  into gold bullion. They will increase their buying as they see paper currencies continue to lose purchasing power.  In 2014, Chinese and Indian buying alone accounted for all annual global gold production from mines.
  6. Central Banks purchasing Gold:   In 2010 central banks began to reverse a twenty year trend by becoming net buyers of gold instead of net sellers.  Central banks will continue to be the largest buyers of gold over the coming decades, which allows them to diversify out of fiat currencies in and protect themselves in the event of a  currency crisis.   On the other hand, Canada has had a long policy of diversifying away from physical commodities to more liquid assets and sold off the last of its gold holdings in 2016.  Today, out of 100 Central Banks listed in order of who holds the most gold, Canada ranks last -  and maybe that reflects Canada's confidence in world currencies.  

We have observed this increased attention on gold, as gold prices reached new highs.  However, we know that gold is often traded on emotions, usually fear of a major economic or currency collapse.  We would caution investors to be aware that there is a huge difference between investing in gold bullion and investing in gold mining stocks.   The high degree of speculation in gold market makes it more volatile, and it is considered a medium- to high-risk investment.   Gold continues to be seen as a safe haven in times of uncertainty, and can be suitable in small quantities for some client portfolios, and if you are interested, we encourage you to proceed with caution, and speak to us first.

For news and views, please visit my website at:  www.elainekelly.ca

Elaine Kelly MBA CFP FCSI

Senior Investment Advisor, Manulife Securities Incorporated