After the 2008 financial crisis and before 2011, gold prices soared sixfold to a record high of $1,900. After that, the price of gold plummeted by 40%. In August of this year, the global stock market fell, the market fluctuated greatly due to the uncertainties of the Chinese economy and the Fed's policy prospects. Investors' risk aversion pushed the euro, the yen and the Swiss franc to appreciate against the US dollar, and the gold price barely rebounded.
So, is the price of gold likely to fall further? We think - will.
Before analyzing the price trend of gold, we must first understand the reasons why investors hold gold. Gold can not only provide economic security in times of difficulty, but also be seen as a tool to hedge against inflation. In addition, gold, as another value storage matrix other than the US dollar, tends to be stronger when the dollar depreciates. Moreover, jewellery buyers have a demand for gold all year round, and these buyers are mainly from Asian economies such as China and India.
However, it seems that most of the above reasons are untenable. Although the world's major central banks have introduced incentives and unprecedented strength, which has raised doubts about their long-term effects, investors are no longer willing to pay a high premium for the protection under extreme circumstances (reflected in the rise in gold prices). . Given global overcapacity and the collapse in crude oil and other commodity prices, inflation is unlikely to resurface in the near term. In any case, the correlation between gold and inflation is reflected over several decades, and its correlation in the short term is not clear.
Gold cannot count on the depreciation of the dollar as a savior. For most of the past decade, the long-term depreciation of the dollar has been anxious for investors until the dollar began to strengthen in 2014, which has eased. Since the US dollar index fell to a record low in 2008, the exchange rate against other major currencies has appreciated by nearly 40%. In recent years, the rebound of the dollar has reflected the decline of gold.
In addition to the short-term rise in demand for jewellery in India in 2013, demand for gold has remained stable over the past decade. However, the demand for jewellery accounts for only half of the total demand for gold, and investment demand is the main driver of the short-term changes in gold prices. In recent years, investors have been reducing their holdings of gold. The total amount of gold held by investors in exchange-traded funds and speculative has plummeted by more than 40% since peaking in December 2012. Investors have good reason to sell gold – gold can't live or pay dividends like bonds and stocks. Since the financial crisis, stocks and bonds have continued to perform well, increasing the opportunity cost of holding gold.
At the same time, gold mine production has continued to climb, especially since the 2008 financial crisis.
In view of these trends, we believe there is room for further decline in gold prices.
So, the key question becomes how much the price of gold will fall? One method of evaluation is to look at the cost of gold production, with a median of between $700 and $800 per ounce. Another way to measure the price of gold is to assess its long-term inflation-adjusted price. Since the early 1950s, inflation-adjusted gold prices have averaged about $700 per ounce.
These measures predict that gold may fall more than 20%. It can also be seen from the gold price chart that the price of gold will gradually decline along the trend channel since 2013, reaching around $1,000 by the end of the year. If you break the lower limit of this channel, the decline in gold prices will accelerate. In September, the Fed decided not to raise interest rates, but the possibility of raising interest rates still exists. The future Fed rate hike is likely to be a trigger, as rising dollar interest rates will boost the dollar exchange rate and reduce the attractiveness of gold as a zero-coupon asset.
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