Wednesday, 23 December 2015

Who Sets The Market Price of Gold?

On-going gold investors and those seeking fresh investments in the yellow metal are bound to be curious about what drives the market price of gold. The reasons for this are manifold. This article is an attempt to put them across in as comprehensive a manner as possible.

Primary Reasons

The primary reasons that control the price of gold in the market are its supply from the mines & sales, leasing, and lending by present holders of gold, and the recycled supply of existing stock of gold above the ground.

The other predominant reasons  being demands of the jewellery industry, electronics and other uses, coin producers, central banks, and individual physical purchases (the two largest sources of these being India and China).

Valuation Drivers

By valuation one means those factors which 'assess ‘the price of gold. In this case, it is real interest rates, the foreign exchange market conditions, other real assets like oil, silver, platinum and palladium, the expansion and contraction of monetary measures in developed and developing countries, and bank reserves.

Psychological/ Technical/ Sentiment Drivers

Under this fall inflation/deflation and their effect on the purchasing power of both cash & cash equivalents & governmental restrictions like taxation and capital controls. The other reasons that drive the market  price of gold are investor reactions to price, volume and volatility based patterns like the ' Elliott Wave' pattern, 'Bollinger Band 'gold price volatility , & 'De Mark TD' sequential market timing indicators.

The other price indicators of gold that come under this sub division are the Gold price trends expressed in other world currencies like the yen, euros, and dollars (America and Canadian),Hulbert gold newsletter sentiment index,  reports of the US commodity futures trading commission (CFTC) ,   bank Participation reports of long and short positioning & miners index of 32 gold mining companies.

Finally, the absolute level of gold coin sales and net flows into and out of closed-end, open-end, and exchange-traded gold also decide upon the price of gold bullion.

Gold Investment

The Bearish and Bullish factors are the other two drivers that determine the market price of gold; these shall be discussed in a separate article.

The table below gives investor's a quick look on how gold is a both a ‘risk & advantage’ ‘investment at the same time.

Gold  - A Potential Investment Advantage

Gold - A Potential Investment Risk

Gold has served as a store for value for centuries now by acting as a medium of exchange and a unit of account. During times of economic uncertainty, like market dislocations investors have been found choosing it as their portfolio choice investment.

The price of gold besides being dependent on the supply /demand market forces is also vulnerable to inflation/deflation of price levels, geopolitical & political disturbances.

Precious metals have for long been used as a hedge against inflation in the levels of price.
The fiscal value of the day to day trading figure of precious metals and precious metal-related instruments is relatively small in comparison to the monetary value of the trading volume of major currency, equity, and fixed income securities markets.

Since the year 2000 the supply and demand forces indicate that the precious metal demand has been driven by fabrication and net investment needs.
Precious metals may be defined as having a relatively rigid supply in case of gold approximately 20% of that mined is in the control of central banks and official international and regional organizations.

The supply demand properties of gold, and their comparative low return in comparison to other asset classes; gold has been called an asset class with multifarious properties, which improve the risk/ reward criteria of investment.

Physical precious metals pay no bonus and may be unwieldy to store, assay, subdivide, insure & transport in quantity.

The value, demand, supply, and complexion of precious metals may be subject to trends in the exploration, production, lending, financing, and sales strategies of select mining companies and the mining industry over all.

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