How to analyze GOLD prices

How Does the Global Gold Market Work?

Gold is traded globally 24 hours a day, similar to the forex market, due to the overlap in trading hours across global markets. Live gold prices are available throughout the workweek, from Monday to Friday.

There are two types of gold prices: the spot price and the futures price. The spot price refers to transactions occurring immediately, while the futures price pertains to transactions set to occur later, usually in a few months. The same gold price is used worldwide and is typically quoted in US dollars. The over-the-counter (OTC) market is the largest in terms of trading volume—according to the World Gold Council, around 90% of global gold trade occurs in the OTC market. Investors trade directly with each other, agreeing on the price and settling transactions themselves (exchanging cash for gold), with buyers and sellers directly interacting.

Key Influences on Gold Prices

Understanding the main factors affecting gold movements is crucial, as predicting or trying to forecast gold prices is challenging. One must comprehend fundamental economic, social, and political events and their impacts to predict price trends accurately.

In addition to monetary policies and interest rates, geopolitical risks and economic uncertainties significantly influence gold prices. Gold is often considered a safe-haven asset, meaning its value tends to rise during times of political instability, economic crises, or market volatility. Events such as conflicts, trade tensions, and economic downturns can drive investors towards gold as a protective measure, thus increasing its demand and price. For instance, during periods of heightened geopolitical tensions or financial instability, gold prices may surge as investors seek a stable store of value amidst uncertainty.

Gold is a global market with various economic, social, and political factors making it difficult to attribute gold’s value fluctuations to a single event. Here are some key factors influencing gold prices:

Monetary Policy and Federal Reserve Decisions

Central banks play a vital role in ensuring economic and financial stability in any country. The Federal Reserve, as the central bank of the United States, influences the US dollar, which impacts gold prices since gold is priced in dollars. The relationship is inverse: if the Fed adopts a tightening policy (raising interest rates due to inflation), the US dollar strengthens, and real interest rates rise, reducing demand for gold (which does not generate returns) as investors shift to interest-bearing assets. Conversely, if the Fed adopts an easing policy (lowering interest rates or buying bonds), the US dollar weakens, leading to higher gold prices.

In summary, any factor negatively affecting the US dollar generally allows gold prices to rise, while any factor positively affecting the US dollar tends to suppress gold prices.

Impact of Interest Rates

It is commonly believed that gold prices have an inverse relationship with rising interest rates. Higher interest rates make fixed-income investments like bonds more attractive, leading to a flow of capital from non-yielding gold to higher-yielding investments. This results in a decrease in gold prices, influenced not only by actual rate changes but also by expectations of future rate hikes.

For instance, the Federal Reserve's last interest rate hike cycle in March 2022, following the inflation surge due to the Russia-Ukraine conflict, saw gold prices drop to a low of around $1630 per ounce by the third quarter of 2022. The Fed's rate hikes attracted investors to bonds with higher returns, reducing gold investments. However, by the end of Q3 2022, gold prices began to recover, approaching $1840 per ounce by the end of the year, as inflation showed signs of moderating and expectations of reduced rate hikes emerged.

Analyzing Gold as a Pricing Game

Gold pricing mechanisms do not always align with fundamental economic or political drivers due to market sentiment and risk appetite, making gold analysis complex. It is more effective to view gold as a currency with relative value rather than a mere commodity based on supply and demand. Market perceptions play a significant role in pricing, and technical analysis often complements fundamental analysis in understanding gold price movements.

Conclusion

Analyzing gold requires an understanding of both fundamental factors and market sentiment. While economic and political events significantly impact gold prices, market perception and technical analysis are also crucial in interpreting price movements and trends. A comprehensive approach incorporating both fundamental and technical insights will enhance your ability to predict and understand gold market dynamics.