Will the price of gold meet market expectations?

23.03.2021

Since the beginning of the colossal forms of quantitative easing during the last year, there are expectations in the markets that gold prices have significant potential for appreciation. However, at the moment we see exactly the opposite - the metal is in a downward trend since the beginning of August 2020.

The main motive that shapes the expectations for an increase is the potential risk of higher inflation due to the quantitative easing programs in the United States. Another factor supporting this view is the possible slower economic recovery than expected.

What drives the price of gold in the last year?

The metal rose 43% to the record $2 074 after the first restrictive measures were accepted in March 2020. This movement clearly highlighted the main feature of gold - to be a haven asset and in times of uncertainty to provide protection for the investor's capital.

Extremely quick reactions from the central banks followed and this changed the bullish expectations of some investors. As a result, the price formed a deep correction, which erased 16% of the value of the precious metal.

Two important questions came out: "How will quantitative easing affect inflation?" and "How can we protect our capital from rising inflation?". Gold is one of the most popular assets that can protect against inflation. For this reason, there has been a lot of speculation about forecasts of its appreciation in the future, but in the last few months, we have seen exactly the opposite. The question is why?

What affects the gold price?

The price is influenced by many factors and reasons, especially in the current risky and unpredictable economic conditions, which we have witnessed in the last year. Tracking them is important because it will allow a better and fuller understanding of the movements we see on the chart.

The first indisputable reason is that there are still no signs of high inflation at the moment. There are no economic indicators to signal such a thing, including the most sensitive to price measurement - CPI and PPI indices.

The stronger US dollar and the higher price of the metal can be pointed out as other factors that limit its appreciation. To these factors, we can add the increasing yield on government securities, which makes them a more attractive choice for investors.

When we talk about expectations, we cannot fail to mention the stock markets, which signal that the risk appetite of investors is higher. The record values of the indices are showing optimism, which usually does not support the rise in the prices of haven assets.

This optimism is fueled by the Fed's predictions, the statements of its members, and the position of Janet Yellen, the US Treasury Secretary. These senior officials do not currently expect higher inflation and forecast a relatively rapid economic recovery, which appears to coincide with investors' views.

The table below summarizes the more important factors that affect the price of gold.

Restricting factors Stimulating factors
Strong dollar Low risk appetite of investors
Higher yield on government securities Data showing high inflation
Higher risk appetite of investors Slower economic recovery
Weak inflation data High expectations for rising inflation
Other haven assets Low price of gold
Expectations for economic recovery New quantitative easing
Low expectations for high inflation  
High price of gold  

 

Market participants weigh the main driving forces and make investment decisions that depend on their interests.

A good example is the Japanese economy when it comes to quantitative easing. They were first implemented in 2001 by the Bank of Japan, but the data show that quantitative easing does not necessarily increase inflation excessively. Their essence is to achieve certain economic goals, which are closely monitored by bankers through a number of indicators.

A completely different approach is the increased printing of money by governments in countries where central banks are not independent to cover their costs. Such policies have led to high inflation or hyperinflation in a number of countries over the years, including Venezuela, Argentina, and Brazil.

What should we consider in the future?

The price movement will continue to be a result of market expectations and the real economic data that are published. Gold will be fundamentally supported if we see signs of higher inflation, a slower than expected economic recovery, or new quantitative easing.

The opposite is also true, but the above factors and reasons must be monitored, as the attractiveness of gold investments relative to other assets depends on them.

Trade Gold

BenchMark offers gold and other precious metals for online trading. The instruments are offered as CFDs on MetaTrader platforms with a narrow buy/sell spread, without commissions and real-time quotes.

Trading precious metals makes it possible to achieve a result both when the price rises (through purchases) and when it becomes cheaper (through short sales) and because they are traded on a margin, deals can be concluded without the need to pay the total value of the metals.

Code in MetaTrader 5 XAU_USD
Commissions NO
Spread $0.25
Min. trading volume 1 ounce
Margin requirement from 10%
Automatic execution YES
Hedging without margin YES
Long/short positions YES
Stop/Limit orders restrictions NO
Expert Advisors YES, without restrictions
Real-time quotes YES, completely free

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