If you are sitting on gold assets, you would be wise to keep hold of your possessions.
After hitting a seven week high of AU$1603 an ounce last week, gold is trading lower at below AU$1,575 an ounce this morning (April 15). This followed a lukewarm recovery in the US dollar against a basket of currencies.
But now isn’t the time for you to be questioning your gold investments. If you’re impatient about flat lining prices, you may have to wait a little longer to see gold push higher.
We’re stuck in limbo. Sellers are losing faith as the US dollar recovers, and buyers want to see gold prices climb higher before purchasing. But higher gold prices aren’t coming unless investors start buying.
It’s a catch 22 that only a drastic change in the value of the US dollar can alter. Let me explain.
What really influences the price of your gold?
Gold bullion trades in US dollars on international markets. That gives the US Federal Reserve real influence in shaping gold prices. Changes to interest rates; revisions to inflation targets; and the value of the US dollar itself all affect gold prices in big ways.
The only thing the Federal Reserve doesn’t influence entirely is the amount of gold in the system. And there isn’t that much gold floating around. It’s not only rare, but finding, mining and producing gold is capital intensive.
That still leaves the US Federal Reserve with the power to keep gold prices on a leash. And that’s exactly what we’ve seen since the US dollar has rebounded.
The question for you is how patient you are willing to be with your gold.
Where does that leave your gold investments?
Barring a seismic event that shreds the US dollar, gold should hold steady. It may fluctuate up or down depending on the dollar, but as long as the US dollar holds strong, the gold price will likely remain flat.
For now all eyes are on the US Federal Reserve. Speculation of interest rate rises put the time frame for late 2016. Any jump in US interest rates will strengthen the US dollar, sending gold prices tumbling. That should leave you with enough breathing room to judge how events unfold.
If you’re still sceptical about what the future holds for gold, you shouldn’t be. Gold remains the safest hard asset to own. It’s been true throughout history, and it holds true today. When confidence in currencies drops, people flock to gold. Let me explain why.
How global markets could push gold prices up
It’s important to remember that volatility in global markets is unpredictable. The global drive to devalue currencies by increasing the supply of currency in the system has created an inflationary environment, regardless of what inflation targets may tell us.
There are only a few precedents we can draw on — most notably the 1929 depression — but no one really knows how this global monetary devaluation will end. But make no mistake; it will be the US dollar that signals which direction gold prices go. If the US dollar plummets, gold will surge.
The reason the US dollar is resilient is because of its importance to world trade. And investors run to it because they see it as a safe haven. The US dollar is not a hard asset like gold, but its dominant position in global trade gives it that impression. But it’s important to remember that the strength of currencies is only as strong as the confidence people instill in them.
Right now there is no alternative to the US dollar. But there may be in the future. The Chinese renminbi is one currency that is poised to have greater influence in the coming years.
That’s good news for holders of gold, because it means the US dollar will no longer retain such a strong influence over gold prices.
What’s more, any transition in the international monetary system shift away from US dominance will see the global economy go through immense volatility. If you’re left holding gold assets, you should enjoy watching prices rise as this unfolds. That is, as long as you decide to hold onto your gold for long enough.
Contributor, Markets and Money
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