In the strongest rise of its kind in more than six years, gold continues to rise in a marathon race against time, due to a number of economic factors and political and commercial tensions to achieve a record level of profits exceeded 1,500 dollars.
In a step to clarify the reasons that led to the rise of gold prices, and what are the main reasons that led to this great rise, we will review the factors affecting the gold markets.
Gold has been able to achieve gains in the past days in conjunction with the gains of global stocks, and the return of risk appetite for investors, as is well known, the price of gold has a strong relationship with economic fluctuations, and is affected negatively and positively with these fluctuations, fears of slowing global economic growth and negative economic data have achieved strong gains for the precious metal (gold) by about $ 100 over the past three weeks, followed by the reversal of the yield curve on US bonds, where US futureTreasury yields fell for thirty years to a record low below two percent, at about one and ninety-two percent, and the yield on two-year treasury bonds fell to about one -47 percent, the lowest level in nearly two years, as concerns remain over global trade tensions and a slowing global economy, according to US economic data.
On the other hand, the sharp losses suffered by the stock markets “Wall Street” especially last week due to fears of an imminent economic recession in the United States, led to help the precious metal to maintain its strength above the level of $ 1,500 an ounce.
According to a recent report by Standard & Poor’s, the risk of a US recession in the next 12 months has been heightened by unpredictability in terms of trade and the deteriorating global conditions led by weak industrial activity.
For one of the most important global reasons, the trade war between the world’s two largest economies (the United States and China) has had a major impact on controlling price trends, and China has threatened to take action in response to new US customs duties on Chinese goods worth 300 billion dollars.
Last week, US President Donald Trump postponed a September 1 deadline to impose a 10 percent tariff on the rest of China’s imports, deferring tariffs on cell phones, laptops and other consumer goods, hoping to reduce the impact on sales of American Holidays.
National Bank of Australia economist John Sharma says the easing of trade tensions and geopolitical risks have provided markets with some hope, boosting stocks, causing a brief fall in gold prices over the past week, adding that the trade dispute remains unresolved and geopolitical risks in Hong Kong considered the most dangerous in decades, global growth trends as we expect at least another cut (to interest rates) by the Federal Reserve (US central bank), all those factors provide support for gold.
The strength of the dollar in the last period has played a key role in curbing the gains of gold, where gold prices fell during the weeks that saw its rise, but it can be said that this decline was somewhat limited with the rise of stocks and the dollar, on the other hand the dollar index rose( US Dollar Index,) which measures the value of the US currency against a basket of six major currencies, hit a two-week high, but fears of a slowing global economy and lack of clarity regarding the US-China trade war helped the precious metal to record in its third week on a row of gains.
In contrast to the somewhat direct correlation between oil and gold, the relationship between gold and the dollar is inverse relationship , as we can call them alternative materials, where the demand for one increases when the price of the other rises , and this relationship stems from the fact that gold is one of the most important tools to hedge against the risks of change in the exchange rate of currencies, investors and dealers in the foreign exchange market can buy gold to cover the risks arising from the weakness of the dollar and, consequently, any other currencies, but the value of the dollar is determined mainly by the rate of exchange in other currencies. As gold is priced and traded in US dollars, some may wonder how each one affects the other. In other words, the higher the US dollar, the lower the price of gold, and vice versa.
From the above, it can be argued that the rise of gold prices to record levels, was due to a number of economic technical and commercial factors, and as evident from the price track, any future change in the price of gold, will be hostage to the economic decisions that have been mentioned in general, and perhaps the change in one of these factors is a reason in the change of the direction of gold prices, whether up or down, but most economic analyzes of the future path of gold prices, indicate a rise or at least maintain the strong gains made during the past days.
Economic Studies Unit
Rawabet Center for Research and Strategic Studies