Money supply is the total amount of currency and other liquid instruments in circulation in an economy. Money supply data is usually collected and published by the country’s central bank.
Central banks hold ~20% of all the gold that has ever been mined. The sheer holding size is why central banks around the world can significantly influence gold prices.
The Fed’s balance sheet is still expanding. It expanded by 0.56% in one month. It was $4.450 for the week ending September 17. It grew to $4.474 trillion for the week ending October 15.
The non-farm payroll tracks the number of jobs added or lost each month. Total non-farm payroll employment increased by 248,000 in September—compared to 180,000 in August.
U.S. public debt is the amount owed by the federal government in terms of outstanding treasury securities. For September 2014, U.S. debt to GDP was 102.9%.
The budget balance is the difference between what a country’s government earns from taxes and other sources and what it spends. A budget deficit occurs when spending exceeds earnings.
The trade balance is reported by the Bureau of Economic Analysis (or BEA) on a monthly basis. The overall U.S. trade deficit in goods and services was $40.1 billion in August.
The Fed is expected to raise interest rates in 2015. The Fed is watching U.S. labor market data to determine when the U.S. economy is ready for its interest rate hike.
Gold is mainly traded in the U.S dollar (or USD). As a result, a weaker USD makes gold cheaper for other nations to purchase. It increases their demand for gold.
Real interest rates are adjusted for inflation. As real interest rates rise, other investments usually become more attractive. This reduces the demand for gold and vice versa.
Inflation slowed in recent months. It accelerated in the second quarter. This was mainly due to falling energy costs. As a result, the inflation outlook also softened for the rest of the year.
Gold prices are down 12%—from the peak of $1,385 per ounce. The peak was reached in March. Currently, it’s trading at $1,230 per ounce.
While I still believe that investor portfolios should contain a strategic allocation to gold, changing monetary conditions provide for a less accommodating environment.
Exposure to gold is also a useful strategy to take advantage of the negative real-rate environment. Typically, gold is a beneficiary when real interest rates become negative as this lowers the opportunity cost of holding the metal.
While I still believe that the precious metal should be a part of a diversified portfolio, I see four reasons why gold prices are likely to decline going forward.
The most important factor is the recent strengthening of the U.S. dollar (or USD) against other currencies. This led to a decrease in gold prices. The decrease was driven by many factors.
The World Bureau of Metal Statistics provides the world mine production data on a monthly basis. Year-to-date (or YTD) the world production is 1,602 tons. This is 1.3% higher than the same period last year.
According to the latest data, inflation for August was 7.8% YoY. Growth in the CPI averaged 8% since 2005. Consumer price inflation is higher than benchmark interest rates.
When we combine the nominal rate of 3% and inflation of 2% for August, we arrive at 1% real rate of interest for savings. This rate is increasing. The increase is a result of inflation.
In 2013, China became the world’s largest gold market. It accounts for around a third of the global gold demand. The World Gold Council (or WGC) expects demand to grow at least another 20% by 2017.