Gold’s supply and demand dynamics
Gold’s supply and demand dynamics are quite different from other asset classes. Unlike other investments, gold doesn’t give any income. Rather, it has to be stored safely and thus entails a cost of carry. Gold’s price depends on the valuation of other asset classes such as equities, bonds, currencies, and real estate. In this series, we’ll talk about various factors that affect the attractiveness of holding gold in an investment portfolio.
Gold’s physical demand is influenced the most by China and India. They consume close to half of the gold that’s produced. US macroeconomic factors are very important for determining gold’s price. The difference between US data and the rest of the world also impacts the attractiveness of gold. We’ll discuss this later in the series.
Gold price performance
Gold prices have recovered from the low of $1,142 per ounce that they reached in the beginning of November 2014. Now, they’re trading at $1,185 per ounce. But even that is a decline of 17% from the peak they reached in March 2014. Investors usually view gold as an inflation hedge. As a result, gold prices are influenced by a set of related factors such as the macroeconomic outlook for the United States and other world economies, performance of alternative assets such as equity, bonds, and the US dollar (or USD), interest rates, and inflation. On the supply side, we’ll discuss the gold mine production and the factors that impact them.
Later in this series, we’ll discuss each of these broad indicators and the factors that influence the indicators and gold prices. We’ll provide some perspective about the direction of gold prices in relation to these key indicators.
Most of these indicators are published monthly. Some of the indicators are reported weekly or quarterly. One very important thing to keep in mind while going through these indicators is that you should analyze these gold indicators together since many of them are interrelated. They point toward the direction of gold prices and gold-backed ETFs such as the SPDR Gold Shares (GLD). They also indicate share prices for companies such as Goldcorp Inc. (GG), Barrick Gold Corp. (ABX), Newmont Mining Corporation (NEM), Kinross (KGC), and ETFs such as the Gold Miners Index (GDX).