Looking forward to what we can expect for the future of gold I spoke with the Head of Commodity Strategy at TD Securities, Bart Melek. To summarize his thoughts, he forecasted that gold prices could reach $1,700 USD soon.
Gold has been deemed valuable since our decedents came to realize the intrinsic value that persisted with it centuries ago. This ideology originated in 3000 BC when goldsmiths in Sumeria began crafting jewelry in various forms with the use of gold. Since then, we have standardized gold’s value beginning with physical gold by a means of a storage of wealth, a medium of exchange and furthering that concept by using gold to be pegged to our more modernized fiat currency. Amidst these changes one factor stands prevalent, gold has continued to exponentially increase its dollar value the scarcer it has become to obtain it and the more demand the commodity holds.
We can partially attribute this to inflation, which is when the price of goods and services increase over a given period of time. Subsequently, this has had a direct correlation with the price of gold. If we are to take a more precise look at the history of gold over the more recent years it becomes evidently obvious that gold prices are most volatile when the US dollar is highly volatile. However, during financial turmoil, the use of gold remains relatively constant, but the demand increases as investors turn to gold by a means of storing their wealth. If we attribute this to the historical figures denoted by the table below, it allows for the presumption that gold prices rise as the dollar weakens, allowing us to infer that gold generally has an inverse relationship with the strength of the dollar. This fairs mostly true with the exception of the early 1980’s where the economy realized the strongest bull market recorded in recent times, increasing the gold price by approximately 2300% from the 1970’s to the peak in the 1980’s. With this being said, it becomes almost expected that the gold prices dropped by 46% following this short-term hyper increase.
Upon further analyzing the primary uses for gold consumption within the last few years, it becomes more prevalent that the use of gold has slowly skewed away from being used in electronics, dentistry and manufacturing as cheaper options have been invented and utilized. However, gold has increased its use as collateral to back debts and diversify investing portfolios by a means of hedging risky investments. In China alone, the World Gold Council (WGC) estimates that the country had 1,000 tons of gold tied up in financial dealings in 2013, which is roughly equivalent to a full year’s demand of gold imports in China. This accompanied by gold’s constant demand in jewelry has continued to rise the demand for gold year after year.
Looking forward to what we can expect for the future of gold I spoke with the Head of Commodity Strategy at TD Securities, Bart Melek. To summarize his thoughts, he forecasted that gold prices could reach $1,700 USD soon. That being said, there are many variables to this. Bart’s reasoning was largely backed on the notation that as the US markets become more convinced that the Fed is ready to ease monetary policy, mixed with an expected weaker dollar and compiled with a materially slower US growth profile in last quarters of 2019, equity correction risks should rise and will likely alter and skew portfolio fund allocations to a safer investment strategy. Based on historical figures, this has generally led to a higher demand for gold which has translated into a high price of gold.
Supporting Bart’s ideology recent news has exhibited numerous signs that the Feds might come in and alter the dollar’s price via monetary policy and quantitative easing to help assist with debt and market volatility. This has already been revealed by the $140 billion-dollar short-term repo market bailout. Furthermore, the demand for market infiltration has continued to be emphasized by reports made public on the economy exclaiming that US companies are taking on the most corporate debt ever, the US debt levels have reached 23 trillion US dollars, an inverted US bond yield curve is prevalent and the risks associated with low interest rates for long term borrowing in relation to the incentive to pay back preexisting debts.
To further understand the volatility of the US dollar I reached out with Daniel Trinder, who has held a Managing Director role in a number of investment banks and is currently doing consultancy for the IMF. Daniel mentioned that the volatility that poses the most threat for the dollar can be largely attributed to the political instabilities and uncertainties that lie in the country. Recent political risks such as trade wars, a Middle East conflict and travel bans have been underlying factors in the US economy and subsequently have affected the US dollar. As more people begin to lose faith and develop uncertainty in the future of the US, we can expect a possible weakened dollar.
Looking back at our historical figures and reiterating my previous observation, this will likely lead to a shift in demand for investments in an effort to safeguard capital. This has generally led to a higher demand for gold, translating into a higher price with all things the same.
Whilst looking at the viable ways to invest in gold, there are many options all posing their own advantages and disadvantages. In an attempt to decipher the best options, I will summarize and justify some of the most common forms of investing in gold.
The first being buying physical gold, this can be done through buying coins, bullion or bars from the Canadian Mint or other Financial Institutions. The pros with this form of investing is that you physically have the gold. This indirectly means that the only volatility that it poses is the price of gold itself. However, the cons typically outweigh the pros in this form as the gold can be subject to theft and the purchase of physical gold possess two premiums, occurring during the original purchase and the resale of it. This allows for profits to be significantly diminished by up to 10% of the gold’s value, a major deterrent for investors.
Another feasible option for investors is investing in mining corporations that primarily deal with the extraction of the gold itself. These stocks pose many benefits as the commissions are very low (the same as regular stock trading fees), and the share prices typically follow the price of gold indirectly, contingent on the holdings, sales, acquisitions and quantity extracted. There are two possible downside risks associated with mining company stocks, the first being that the actual gold extraction process is typically done in very politically volatile areas of the world and the work can be very harsh and unethical for workers. The second risk that is indirectly linked is the management of the corporation can substantially dictate the share price of the company, a huge liability for investors to hold. The final and most common ways to invest in gold is via an ETF (Exchange Traded Fund), this is a stock that varies directly with the exchange price that persists with gold and the dollar having an average deviation of only 20 basis points between the two prices. The benefits of this route of investment is that you don’t share any liability that doesn’t related directly with the price of gold. The main liability with ETFs is that they pose liquidity risks, typically dependent on the size of the ETF itself, the smaller the ETF, the more liquidity risk.