For years and years, gold has been seen as the symbol for wealth and success. It has been used widely as a currency in itself. Also, the Gold Standard was used to back many fiat currencies in the world’s biggest countries. It was not until 1971 that the Gold Standard was removed from the US dollar. This led to big changes in the Gold Price Index.
These days, gold is often used as an investment tool. It is also used in jewelry and some technologies. The world’s gold production comes mainly from South Africa, US, Canada, Russia and China.
The Gold Price Index is the index of the spot price of gold in the large markets.
The main area of world gold markets is London. Two times a day (weekdays only) London’s largest gold banks have their open orders cleared after they have agreed on a price. The agreed price is then made public with the Gold Price Index instantly updated. You must make sure that gold orders are placed by 2.45 PM London time. Due to the daily price announcement being made at 3 PM and the Gold Price Index reacts strongly to the outcome.
The Gold Price Index is just like any other asset that is openly traded; it is affected by supply and demand.
Most of the time, it is not like most other investment assets. Disposal affects the Gold Price Index more than consumption. Most of the gold mined is used for things other than investment products. These uses are for jewelry, dental and industrial production. Making up to about 80% of the annual gold that is mined. Only about 20% of annual production is used by ETFs and retail investors. As a result, the Gold Price Index is affected more by demand changes. This is opposed to changes in the supply (level of annual change of gold supply).
A huge factor affecting the Gold Price Index is the actions of Central Banks and the IMF.
Central Bank decisions, regarding if they will increase or decrease their gold reserves, can lead to large changes in the Gold Price Index.
For example, since the Euro crisis hit, China has moved away from Euro investments. They have moved more towards buying gold. China is now the world’s largest consumer of gold. Some other countries also raised their gold reserves recently.
The reason that the central banks affect the Gold Price Index so strongly is that the interest rates are related closely to the Index.
As the central banks are making monetary policy decisions, they can directly affect the Gold Price Index.
This relationship was seen when the ECB raised rates for the first time in 2011 since the crisis began. Shortly after the rates change was made, the Gold Price Index hit new highs. When central banks begin to buy larger reserves of gold, the Gold Price Index goes up as their currency supply rises. Resulting in the availability of gold becoming scarcer.
Monetary policy is not the only macro factor that affects the Gold Price Index. Other variables largely affect the Gold Price Index. These include currency exchange rate changes, oil prices, QE actions and changes in equity market returns.
A key function of the Gold Price Index is to use it as a hedging tool.
The most common risk that it is used to hedge against is factors such as deflation, inflation and devaluation of a currency. In these cases, gold will always be traded as it holds value outside of politics. As gold is valued worldwide, the Gold Price Index is known as a safe investment. This is especially true when the value of paper money starts to decline. Currencies can come and go. Countries can default. But the Gold Price Index is always seen as a safe bet.
The number of strategies to buy and sell gold is endless. You can find many opinions and thoughts for investing in the Gold Price Index. Fundamental analysis is used to assess macro factors. These include interest rates, inflation, growth rates of GDP and productivity.
The performance of the Gold Price Index can often be seen in comparison with normal stocks. Due to their differences being distinct. Many people see gold as a store of value (with little to no growth). On the other hand, normal stocks are seen as tools whose value gives a return (dividends and the growth of the price). Normal stocks thrive under conditions of economic and political stability.
It can be said, that because of large changes in the past Gold Price Index, that gold, in fact, does not hold its value when compared to bonds and stocks. We will now see an example of this line of thinking. You invest $1 in 1801 in bonds. By the year 1998 it would be worth nearly $1,000. You invest $1 in stocks. It would be worth ~$500,000 in 1998. You invest $1 in the Gold Price Index in 1801. By the year 1998 it would be worth a measly $0.78. (The 1998 price is shown in real terms).
Tech analysis is used to look at the changes of the Gold Price Index by using MAs, chart patterns and trends. Through this investors try to predict new breaks in the price so as to profit from correctly calling these changes.
In recent years, we have seen the effects that a global crisis can have on the Gold Price Index. Some say that gold is a crisis commodity. This is because the Gold Price Index tends to rise in times of crisis. In these times, people have very small or no confidence.
The economy, government, central banks, financial markets, etc. are in chaos. This effect is due to people turning to gold as a safe way to invest their cash in times of bad crisis. Also, people have seen that the value of the US dollar has an inverse relationship with the Gold Price Index. The US dollar is the world’s main reserve currency. So when the dollar is strong, it can be seen that the price for gold is then weaker.