Gold prices continued their downward trend during the first three weeks of April. The yellow metal bounced back in the last week to recover half the losses incurred in the month. The speculation around the fast paced recovery of US economy and the concerns over Cyprus has dented gold’s reputation as a safe haven from risk and loss. With US dollar strengthening its position, gold prices faced signs of record down fall. Gold ETF’s remained net sellers. Not just the retail investors, even the Institutional Investors started looking for a substitute for their alternative investments.
During the second week, gold faced sell off pressure due to a draft plan for Cyprus to sell off a part of its gold reserve. The European Commission recom-mended Cyprus Bank to sell off its gold reserves to raise around 400 million Euros. Though it is not an alarming amount gold inflows into the market, the concerns were high that the other troubled European nations may also follow the same suit to fund their debt. The downward pressure on gold prices continued in the third week and the yellow metal ended the week at near ten percent loss. Most of the global banks have cut short their forecast on gold prices. This along with the continuing Cyprus gold sell out mounted pressure on the gold prices.
The low gold prices at the end of third week of April have set a bearish tone especially in the countries like India. The speculation that Non- European banks may increase their gold reserves also favored the upward movement of gold prices in the fourth week of April. The low prices prompted the consumers to opt for gold which increased its demand. However, the faith of investors in US economy and receding fears of inflation will negatively impact gold.
It is a common misconception that real estate and gold never loose their value. The history of gold prices have a different story to tell. Gold as an investment is no different from equities. The factors which affect the equity markets play their role in bullion markets as well. A study of the factors which affected the gold prices for the last 40 years will give us an insight on how volatile the bullion markets have been.
1970 —1980 : First signs of bull run
The 1970 —1980 period witnessed the first major bull in gold market. Rated at USD 35 per ounce at the start of 1970’s, gold recorded it peak at USD 850 in January 1980. The fall of Bretton Woods System was the governing factor for such a record high back then. Bretton Woods System was initiated in 1944 when dollar was pegged to gold. US has to maintain a constant reserve of 1 ounce of gold for every 35 USD. Bretton woods system was dissolved by US President Nixon in the year 1971. The yellow metal was allowed to trade freely after the collapse of Bretton Woods system. In the 1970’s most of the western countries faced high inflation rates, low growth and high unemployment rates. It was during this time the investors started intorducing gold as a part of their portfolio. Most of the countries started following floating exchange rate system as opposed to the fixed transactions in USD. In 1973, for the first time gold broke the USD 100 barreir. It was in January of 1980, gold recorded its highest price of USD 850 per ounce. The political turmoil at that point and weak economic data across the globe helped the gold reach its all time high of that period. If you consider the inflation adjusted prices, the USD 850 per gram still remains the all time high price recorded by gold.
1980 —2001 : Correction Period
It was more like a one way down south for gold, after experiencing the record price in January of 1980. By January 1990, gold was trading around USD 400 per ounce. It started the new millennium in January 2000 at around USD 300 per ounce. So it was a two decades of down fall for the yellow metal. The economy of the western countries was booming in this period. They had stable economic conditions compared to the stagflation experienced in the 1970’s. The interest rates during this time were also at record highs in order to control the inflation rates. The investors were favoring shares and bonds over gold. In the 90’s the major factor for downfall in gold prices was the technological revolution. US transformed itself from being a manufacture heavy industry to a technology and service based economy. There was a huge growth in productivity and expectations were riding high on the new technology wave. Gold lost its luster in this high tide.
Post 2001 : The bull run that seemed like forever
Gold prices have experience new highs post 2001. Trading at around USD 250 per ounce, it reached as high as USD 1400 per ounce in 2011. Lack of supply, demand from India and China had a role to play in this rally. India and China are the largest importers of the gold. Starting 2001, the gold production fell and the demand from these countries was on a rise. It was still a steady growth for gold till the start of recession times. The start of recession times around the year of 2007 sparked substantial spikes in gold prices. The announcement of stimulus packages by US sparked this rally. The national debt of US was on a rise. Investors started favoring gold as a hedge against economic uncertainities. Even the central banks of various nations joined the gold buying spree to boost their gold reserves, driving the demand and prices higher.
Gold as any other investment do not always guarantee a positive return. It is a safe haven against inflation and economic or political turmoil. But the history always gave ample examples of how various economic factors played their role in determining the gold prices. It is a good option to hold gold as a part of your portfolio to counter the unforeseen economic or political actions. But vesting all the money in gold especially during the times when bullion markets are looking for future signs from major economies is not a viable option.