The Fundamentals to Forecasting Gold Prices

Written By Peter August, CEO, Melbourne Mint.

Since 2001 gold’s price has increased over 500 per cent, from a low of US$258 to around US$1,400 at present representing an annual compound growth of 14 -18% per cent. Gold’s long-term upward price trend is a reflection of the malaise that has been affecting the world since the early 2000’s – quantitative easing, inflation, economic turmoil, geopolitical turmoil, central bank buying and the structural problems in the banking system – all of which fundamentally drive its price.

Therefore when forecasting physical gold prices we must seek an understanding that is not based purely on technical analysis, but one that considers the above fundamental drivers. As more people turn to physical gold as a means to hedge the affects of these drivers, demand for gold grows. If all of these drivers do not change nor will the gold’s long-term price increases.

Central banks quantitative easing policies, or to put it simply money printing, is said to greatly determine inflationary growth.  As we have no control over government decisions to launch such policies, currency is considered to be subject to high counterparty risk, in other words you don’t have to worry whether the economy of the country you hold the currency of will perform well. Gold conversely is immune government quick fixes that cause inflation; it cannot be tampered with, replicated, diluted or devalued to achieve temporary economic relief.  As global money supply continues to rise alarmingly, so will demand for physical gold and subsequently its price.

It is debatable that the global financial crisis is now behind us, the outlook for global markets remains riddled with uncertainty. In the wake of the worst market volatility in a generation, investors will continue to explore alternative investments like gold to safe guard wealth; further facilitating continuous increases in gold’s price.

Geopolitical issues such as changes to policy, war, and taxes imposed on trading are also a fundamental that’s said to drive demand for gold and its price.  As the economic health of many nations continues to balance on the condition of external political relationships, more investors are seeking safe alternative investments. In all probability these political dramas are not going to fix themselves overnight nor in the foreseeable future.

Increased central bank buying is another key fundamental driving gold’s long-term price increases. In the midst of market volatility nations, like individuals, seek traditionally safe investments that are not intertwined in the failing financial system. As a result a long-term trend of countries building vast gold reserves in place of other financial investments has surfaced and it is central banks in emerging nations leading the way. The rush to amass gold reserves is increasing its scarcity, and as its scarcity increases so does its price.

It is no secret that many areas of the international banking system rest on unstable structures. With the interwoven nature of this globalised economy, only one aspect of the system needs to fall to trigger widespread economic concern consequences.  Investors now understand financial investments that rely on the longevity of a prosperous international banking system can be hazardous. As the banking system continues to shake on its foundations, investors will continue to seek alternative investment options such as physical gold. This is why it is integral to factor in the banking system as a fundamental driver when forecasting price.

Peter August, CEO, Melbourne Mint

Peter August has many prestigious titles including CEO of Melbourne Mint, the Managing Director of Australian Bullion Company (Australia’s oldest privately owned bullion company), the founder and Managing Director of Universal Coin Co and the founder and Managing Director of Gold Merchants International, a global gold wholesaling company. Peter is also a director on the board of three global gold buying companies and a global gold mining company. He is an avid collector and a founding member of the Numismatics Dealer Association, a position he has held for 21 years. In total Peter has over 25 years’ experience in the precious metals and numismatics industries.

 

©2018 - Precious Metals Investment Symposium

Precious Metals Investment Symposium