By Adhvith Dhuddu
(Op-ed as appeared in the Business Line Hindu on Oct 21st)
Gold recently broke through the $1,000/ounce psychological barrier, generating interest among investors, traders and even the common man. Currently there are many factors abetting the price rise in gold. Although no concrete prediction can be made about the price, the outlook appears bullish. There are nine crucial factors that affect the price in the short and long term.
LONG-TERM DRIVERS
Forex reserve allocations: The Asian Financial Crisis in 1997-98 resulted in an accumulation of forex reserves over the last decade. After amassing forex reserves in US treasuries, many Asian economies and export-oriented countries have exhausted their appetite for US debt.
The slow divestment from US treasuries to gold and other precious metals will impact the price of gold. An increasing proportion of forex reserves is being held in gold as countries realise that this could also be a sensible hedge against a slumping US dollar.
Dollar-denominated asset: Gold, like most other commodities, is a dollar-denominated asset. The implication of this is simple: Any significant movement in the US dollar directly impacts the price of gold. Broadly speaking, the price of any dollar-denominated asset (oil, gold, silver, etc) will increase as the US dollar declines and vice-versa (this is because as the US dollar erodes in value, it can buy less of the same commodity).
Over the long term, this will drive the price of gold as many economists and investors continue to express their bearish outlook on the dollar.
Commodity bull market cycle: The commodity bull market cycle will considerably impact the long-term price of gold. Commodity cycles usually last 15-20 years and this one, which started in early 2000s, will peak between 2017 and 2020. Prices of steel, copper, sugar and oil have risen significantly from the early 2000 and will continue to do so steadily for another decade or so.
Inflation fears: If the purchasing power of a currency erodes slowly, it is only because of the inflationary forces present in the system.
Similarly, the purchasing power of the dollar is a direct function of the supply and demand. For several decades, the supply of dollars has been increasing constantly but, concurrently, there has been a steady rise in the demand for dollars. Now, supply of dollars is rising at a higher than average rate, and there is no guarantee that demand will persist.This is why many pundits fear an inflationary spiral in the US that could send gold prices soaring.
Dow-gold ratio: Many analysts use this ratio to gauge the long-term trend of gold and the Dow Jones. The Dow-gold ratio is nothing but the Dow Jones Index divided by the price of one ounce of gold. Currently, it takes approximately 9.9 ounces of gold to “buy” the Dow. This number has ranged from two to 44 in the last 80 years but 9.9 is slightly below the long-term average of 12-13.
According to the mean reversion theory, one of two things should happen: The price of gold should fall from its current levels or the Dow has to rise considerably. It is really anyone’s guess what could happen.
As a safe haven: The supply-demand equation of an asset is what determines its price in the marketplace. Like many other commodities, the supply of gold will always be constant and increase slowly as mines become operational and new technologies to unearth gold are invented.
But the demand for gold can surge if there is a sudden perception of weakness in a currency, the economy or the stock market. New highs in gold prices clearly reflect that demand for gold is rising and will continue to. Gold has always been a safe haven investment in times of economic and financial crisis, and it could happen again if the current recovery shows cracks.
SHORT-TERM DRIVERS
Surpassing resistance: When gold surpassed $1,000/ounce, a crucial resistance level was broken. In the last four-five years, gold had difficulty breaching the $1,000 level and backed off three times after hovering around the high $900 levels.
This time, after breaching $1,000/ounce, it has shown considerable strength and could reach $1,250-1,300/ounce in a few months.
Technical chart: In addition to breaching resistance, two other important technical indications point to higher prices. The price of gold is comfortably above the two critical moving averages, the 50-day and 200-day moving averages. If a six-seven-year gold chart is examined, gold prices form higher tops and bottoms consistently.
This bullish chart formation only strengthens the case for higher gold prices. Worth mentioning in this context is that the dollar index chart forms the exact opposite structure with lower tops and lower bottoms, confirming that the dollar might continue to weaken in the short term.
Indian festival season: According to analysts, the Indian festival season could give a temporary impetus to gold prices and help sustain the bullish run.
Although not a driving factor in the long-term price of gold, the appetite of the common man for gold in countries such as India and China does impact the price. It is true that the long-term average return on gold is a measly 3-4 per cent; but the next few years could see greater yields on investments in the yellow metal.
(The author is an asset manager based in India and the US.)
Online Link to this Article: http://www.thehindubusinessline.com/todays-paper/whats-next-for-gold/article1067163.ece?ref=archive
(Op-ed as appeared in the Business Line Hindu on Oct 21st)
Gold recently broke through the $1,000/ounce psychological barrier, generating interest among investors, traders and even the common man. Currently there are many factors abetting the price rise in gold. Although no concrete prediction can be made about the price, the outlook appears bullish. There are nine crucial factors that affect the price in the short and long term.
LONG-TERM DRIVERS
Forex reserve allocations: The Asian Financial Crisis in 1997-98 resulted in an accumulation of forex reserves over the last decade. After amassing forex reserves in US treasuries, many Asian economies and export-oriented countries have exhausted their appetite for US debt.
The slow divestment from US treasuries to gold and other precious metals will impact the price of gold. An increasing proportion of forex reserves is being held in gold as countries realise that this could also be a sensible hedge against a slumping US dollar.
Dollar-denominated asset: Gold, like most other commodities, is a dollar-denominated asset. The implication of this is simple: Any significant movement in the US dollar directly impacts the price of gold. Broadly speaking, the price of any dollar-denominated asset (oil, gold, silver, etc) will increase as the US dollar declines and vice-versa (this is because as the US dollar erodes in value, it can buy less of the same commodity).
Over the long term, this will drive the price of gold as many economists and investors continue to express their bearish outlook on the dollar.
Commodity bull market cycle: The commodity bull market cycle will considerably impact the long-term price of gold. Commodity cycles usually last 15-20 years and this one, which started in early 2000s, will peak between 2017 and 2020. Prices of steel, copper, sugar and oil have risen significantly from the early 2000 and will continue to do so steadily for another decade or so.
Inflation fears: If the purchasing power of a currency erodes slowly, it is only because of the inflationary forces present in the system.
Similarly, the purchasing power of the dollar is a direct function of the supply and demand. For several decades, the supply of dollars has been increasing constantly but, concurrently, there has been a steady rise in the demand for dollars. Now, supply of dollars is rising at a higher than average rate, and there is no guarantee that demand will persist.This is why many pundits fear an inflationary spiral in the US that could send gold prices soaring.
Dow-gold ratio: Many analysts use this ratio to gauge the long-term trend of gold and the Dow Jones. The Dow-gold ratio is nothing but the Dow Jones Index divided by the price of one ounce of gold. Currently, it takes approximately 9.9 ounces of gold to “buy” the Dow. This number has ranged from two to 44 in the last 80 years but 9.9 is slightly below the long-term average of 12-13.
According to the mean reversion theory, one of two things should happen: The price of gold should fall from its current levels or the Dow has to rise considerably. It is really anyone’s guess what could happen.
As a safe haven: The supply-demand equation of an asset is what determines its price in the marketplace. Like many other commodities, the supply of gold will always be constant and increase slowly as mines become operational and new technologies to unearth gold are invented.
But the demand for gold can surge if there is a sudden perception of weakness in a currency, the economy or the stock market. New highs in gold prices clearly reflect that demand for gold is rising and will continue to. Gold has always been a safe haven investment in times of economic and financial crisis, and it could happen again if the current recovery shows cracks.
SHORT-TERM DRIVERS
Surpassing resistance: When gold surpassed $1,000/ounce, a crucial resistance level was broken. In the last four-five years, gold had difficulty breaching the $1,000 level and backed off three times after hovering around the high $900 levels.
This time, after breaching $1,000/ounce, it has shown considerable strength and could reach $1,250-1,300/ounce in a few months.
Technical chart: In addition to breaching resistance, two other important technical indications point to higher prices. The price of gold is comfortably above the two critical moving averages, the 50-day and 200-day moving averages. If a six-seven-year gold chart is examined, gold prices form higher tops and bottoms consistently.
This bullish chart formation only strengthens the case for higher gold prices. Worth mentioning in this context is that the dollar index chart forms the exact opposite structure with lower tops and lower bottoms, confirming that the dollar might continue to weaken in the short term.
Indian festival season: According to analysts, the Indian festival season could give a temporary impetus to gold prices and help sustain the bullish run.
Although not a driving factor in the long-term price of gold, the appetite of the common man for gold in countries such as India and China does impact the price. It is true that the long-term average return on gold is a measly 3-4 per cent; but the next few years could see greater yields on investments in the yellow metal.
(The author is an asset manager based in India and the US.)
Online Link to this Article: http://www.thehindubusinessline.com/todays-paper/whats-next-for-gold/article1067163.ece?ref=archive
1 comment:
do you mean GTF returns will be higher than stocks in future
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