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U.S. Money Reserve Explains What Drives Gold Prices Up and Down

What Drives Gold Prices Over the Short Term and Long Term?

John-Rothans

Written by John Rothans

Jun 27, 2019

Do you watch gold prices like you immerse yourself in college football? If so, you’ve probably noticed that different things trigger gold prices to go up or down at different times, similar to what happens with gasoline prices.

As America's Gold Authority®, U.S. Money Reserve is uniquely positioned to speak to how gold prices work. Follow along as we explain how short-term and long-term drivers of gold prices differ and overlap, and how you can incorporate this knowledge into your precious metals portfolio strategy.

Short-Term Drivers of Gold Prices

In the short term, the price of gold can shift for several reasons, all of them tied to what’s happening “in the moment.” Here are a few of them.

Stock market movements

The stock market can enjoy a good day or a bad day. It's always up or down. Likewise, gold prices also can go up or down, and historically they typically do the opposite of whatever the stock market is doing. If the stock market experiences a rocky day, then gold prices tend to go up. The opposite is often true when the stock market posts substantial gains.

Interest rates

What the Federal Reserve does regarding interest rates correlates with the rise or fall of gold prices, and also the stock market.

Typically, if the Fed hikes interest rates or signals it might do so, gold prices go up. But if the Fed lowers interest rates or indicates it might do so, gold prices generally go down.

Currency changes

As explained by Kitco News, when the U.S. gains strength, it takes fewer dollars to buy any commodity priced in U.S. dollars, including gold. And when the U.S. dollar weakens, it takes more dollars to buy the same commodity. Therefore, the price of gold can go up or down based on the changing value of the dollar.

Geopolitics

A trade war with China. Stepped-up tensions with Iran. Tariffs on goods imported from Mexico.

Those and other geopolitical pressures can influence short-term gold prices. Generally, gold prices climb when geopolitical affairs are uncertain, while they drop when geopolitical affairs are relatively calm. Simply put, global turbulence can spur safe-haven buying of gold.

U.S. politics

U.S. elections—particularly presidential elections—play a crucial role in short-term gold prices.

Given that the president appoints many people who dictate monetary policies, and the president sets the overall tone for monetary policies, short-term gold prices can fluctuate based on uncertainty over who the next president will be. They also can fluctuate, of course, when a new president is elected or takes office.

Historically, the price of gold slumps before an election and rallies after. As we pointed out in an examination of the 2016 election and gold prices:

“In 2004, gold trended lower the first three weeks of October before rallying about ten days before the election; in 2008, gold prices decreased…during two weeks in late October and experienced a similar pre-election slump again in 2012.

After George W. Bush was re-elected in 2004, the price of gold jumped approximately 7% the month after the election and increased 4.8% overall that year. After Obama was elected in 2008, the price of gold increased 17.8% by the year's end.”

Supply and demand

Supply and demand affect everything from gasoline to airfare to housing. You can put gold into that category, as well.

If demand for gold suddenly spikes—propelled by an increase in interest rates, for example—the price normally spikes along with it. But if demand weakens, then the price usually declines.

In terms of gold supply, no one knows for sure how much gold is left in the earth. The U.S. Geological Survey estimates that there are about 57,000 tons left to be mined. That might sound like a lot but compare it to the amount of gold that’s already been extracted. What you’re left with is a cube that’s about six meters on each side—a cube that would stand nearly as tall as an adult giraffe.

Lack of confidence in the economy

A sudden lack of confidence—or bout of confusion—surrounding the economy can spur gold prices upward, too.

For example, gold prices spiked to their highest in more than five years on June 20, 2019 after the Federal Reserve hinted at possible interest rate cuts as early as July, notes CNBC. But, will they? Wall Street strategists are skeptical, as are analysts from Goldman Sachs and Bank of America, reports The Wall Street Journal. Then again, the CME Group puts a rate cut possibility at 85 percent, so who knows? In the meantime, people turn to gold (and gold prices turn up!).

Long-Term Drivers of Gold Prices

Long-term drivers of gold prices tend to be connected to broader circumstances than short-term drivers. Here are four long-term drivers.

Wealth and economic expansion

According to the World Gold Council, there’s an “unequivocal link” to gold prices from wealth and economic expansion. Demand for gold historically has been correlated positively to economic growth.

Here’s one way of looking at this: As global incomes jump, so can demand for gold jewelry and technology that includes gold, like smartphones, tablets, and computers. Income growth also encourages savings, which helps spur demand for gold bullion coins and gold bars.

Market risk and uncertainty

Market risk and uncertainty also impact gold’s long-term performance. Many wealth holders view gold as a safe haven, effective in hedging currency depreciation, high inflation, and other economic risks, the World Gold Council says.

Opportunity cost

Macroeconomic variables, such as interest rates, might increase or decrease the relative cost of holding gold. This greatly affects opportunity cost, which translates into the benefits that might slip away when someone picks one alternative, such as cash, over another alternative, like gold. (The cash vs. gold debate is almost as old as time. Read more about it in Cash vs. Gold: Which Asset Could Prove Better.)

Momentum

Price momentum—what the present and future look like for gold prices—can enhance or depress the direction of gold’s long-term performance, according to the World Gold Council. Downward momentum, resulting in lower prices, might translate into an excellent time to buy gold as part of a long-term strategy.

Overlap of Short-Term and Long-Term Drivers

Short-term and long-term drivers of gold prices don’t operate in a vacuum. As you might expect, some of them overlap. For instance, the health of the economy carries both short-term and long-term implications for gold prices. Market risk also is a short-term and long-term driver of gold prices.

As such, it’s important to track what’s happening with gold prices now and what the trajectory of gold prices looks like. In the end, you can work short-term and long-term drivers to your advantage when it comes to buying gold, seizing on opportunities when short-term and long-term indicators are in your favor.

What drivers do you see right now? Our Account Executives see them, too. Call U.S. Money Reserve at 1-844-307-1589 for a one-on-one wealth consultation and conversation.

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