July started with a new record for the gold market after prices reached their highest point in the last 8.5 years. On Wednesday, the price of gold escalated to $1,790.70 an ounce — the highest it’s been since 2011.
Majority of analysts predict that the market will remain bullish, with expectations that the price of gold will pass the $1,800 mark. However, the price of the precious metal has already pulled back since the start of the month. August gold futures are now down 0.39%.
What’s driving the price of gold?
Like most financial markets, the factors affecting the price of gold include supply, demand, investor sentiment, economic stability, and the geopolitical landscape. But rather than plummeting, gold prices rally in the midst of financial uncertainty. Gold is still viewed as a safe haven instrument because of its intrinsic value. In comparison, the value of currencies like the British Pound or the US Dollar generally decline during a recession — or at the first signs of it. Investors pull back from trading currencies and put their money in gold because it’s not likely to depreciate.
One clear example of this pattern is seen in the Great Recession that occurred between 2007 and 2009. A few years later, the price of gold peaked at $1,917.90 an ounce. In 2011, financial uncertainty was still lingering, the dollar continued to decline, and the national debt continued to rise. Investors put their assets in gold instead of riskier instruments, like currency, stocks, and real estate.
Today, some of the most important factors influencing the price of gold are related to the state of the pandemic. Spikes in coronavirus cases may influence investors’ behaviour, specifically in their willingness to take risks. International relations should also be taken into account, with the US creating trade tensions with Europe and China in particular. US President Donald Trump is planning to raise tariffs on European goods, while also threatening its trade relationship with China, the second biggest economy in the world. These can further weaken the economy of the US, forcing investors to impact the price of gold.
It’s important to note that the price of gold generally increases when economies are experiencing a crisis. More positive trends typically mean lower gold prices. Case in point, the recent decline in August gold futures is attributed as a reaction to the newly released employment report in the US, which reveals that 4.8 million jobs were created in June. The unemployment rate is now down to 11.1% compared to earlier in April when 14.7% of the population were rendered jobless as a result of the pandemic. This points to the US economy being stimulated as normalcy returns. It also shows a huge improvement in the labour market. Immediately after the release of the report, gold speculations decreased.
However, it’s best to remain critical given that there’s still a lot of uncertainty surrounding the pandemic. Economies haven’t fully recovered, with many countries and states are seeing new waves of cases of coronavirus. The partial financial rebound may backfire, further impacting investor behaviour and the price of gold.