What The Gold Price Is Telling Us About What Is Happening In The Global Economy
The price of gold can give investors a realistic glimpse into what is happening in global markets and what other investors might be expecting. The price of gold has been particularly interesting over the last few months as it has been strong up until last week, reaching new highs every couple of weeks. However, since Trump won the US election, last week, the price of gold has been showing weakness. In this week’s article, we will unpack what led to the heightened gold price as well as why it is currently under some pressure giving you, as an investor, a well-rounded understanding of where global markets are currently.
Gold has always been considered a safe haven investment as investors would increase gold exposure in their portfolio during times of uncertainty. The reason for this is that gold is a tangible asset that holds intrinsic value, unlike shares or bonds that’s value is tied to the performance of a company. The value of gold is also not tied to one country’s economy or currency and is globally accepted making it a particularly popular asset class during times of heightened uncertainty. Ongoing geopolitical tension, first due to the war in Ukraine, with questions about how far it will escalate into Europe, and then with unrest in the Middle East, leading to pressure on oil prices, has been leading factors contributing to uncertainty for global investors. It is also important to understand that gold is a highly liquid asset that can easily be bought and sold. This characteristic adds to its appeal to own it during times of increased uncertainty.
Furthermore, gold is a limited resource with limited supply entering the market. Therefore while supply is considered stable, and demand is increasing, the gold price will naturally increase. And not only is demand increasing due to investors considering it a safe haven, but also due to its increased use in technological advancements. This is due to gold being resistant to corrosion while being highly chemically stable. American Bullion claims that approximately 7-10% of global gold demand comes from the electronic industry.
So, with these driving forces behind the gold price why has the price of gold come down since Donald Trump has been elected as the new president of the United States? During Trump’s campaign, he has been vocal about three important policies he claimed he will implement immediately after taking office. These policies are as follow: imposing aggressive tariffs on imports, especially from China, which will effectively increase the input costs of many goods which will ultimately lead to higher prices. Secondly, he wants to cut taxes for businesses and finally, he wants to mass deport undocumented immigrants which may lead to a shortage of labour which economists are warning will also drive up prices.
This is important, since an increase in inflation, or at least uncertainty around how Trump’s policies will impact inflation, is causing investors to be cautious about how the Fed will react by cutting interest rates. Let us first take one step back to better understand the inflation situation we are in today. As many know, post-COVID inflation has been on the rise due to increased money supply following governments providing stimulus packages. Supply chain problems also affected the supply of goods which put pressure on already high prices. In reaction to this, reserve banks across the world, and South Africa included increased interest rates as a way to manage inflation. By increasing interest rates, consumers have less disposable income and therefore demand for goods drops leading prices to come down and inflation is brought back to acceptable levels.
Only as recently as September of this year did the Fed finally start cutting interest rates as they felt inflation was under control after a relatively long period of heightened inflation. However, due to the possible effect Trump policies may have on inflation, as explained above, many investors sense that the Fed will not be cutting interest rates at the same rate or pace as was previously expected.
How is this then related to the gold price? Well with interest rates now expected to stay elevated, it is also causing the dollar to strengthen. This happens as demand for the dollar increases as investors want to buy US investments that will deliver higher returns against the backdrop of interest rates possibly staying higher. With the dollar being stronger, buying gold, priced in dollars, becomes more expensive for investors from non-dollar countries.
Many investors are however arguing that this drop in the gold price might only be temporary as many investors believe it is only a correction in the market following the gold price rising so rapidly over the last few months and many investors might only have banked in some profit. With the increased uncertainty over how Trump’s policies will impact the global economy and inflation, many investors may again add gold to their portfolios, leading to an increase in demand in the future.
It is clear that many factors are all playing into the price of gold, giving global investors a glimpse into how global markets are considering past and future dynamics and policies. Regardless of how the price of gold will be impacted in the future, it is clear that it is a good indication of various market influences and an interesting indicator to keep an eye on. By Charne Olivier