Summary:

Gold has a long history as a reliable hedge against market volatility and a weak dollar.

Its market value has a negative correlation with the greenback.

Today’s uncertainty and frictions push us to a positive gold price forecast, with the expectation of a surge.

“Gold is a constant. It’s like the North Star.” Steve Forbes, Editor-in-Chief of the Forbes Magazine

This article was written by the I Know First Research Team.

Gold has a long, long history of being associated with wealth and high social status, and even more than that – with its yellowish color reminiscent of the Sun itself, its pure and clean shine as well as the immunity to corrosion, gold was closely connected with religion. For example, in ancient Egypt, gold was considered to be nothing less than the flesh of the gods themselves. Somewhat similarly, the Incas considered gold the sweat of the sun god, and thus, viewed it as the perfect material for various religious objects. And that is far from the full list, of course.

With time, gold also came to play a major role in the financial system. Golden jewelry would be used by merchants for trading scores of years ago, but the first use of gold and, more specifically, golden coins as a currency dates back to the 8th century BC in Asia Minor (a region that is now part of Turkey), and the first pure gold coins were issued in the kingdom of Lydia. Its appreciation across borders made gold a perfect fit for a point of reference in trade, which allowed it to usher in a long era of being a major pillar of the nascent global finance.

This system has eventually evolved into the golden standard in its many shapes and forms, with different currencies, golden and not so much, backed by the promise of the issuing government to exchange the currency for the appropriate amount of gold at request. Until 1971, this is how it worked with the dollar bills, but then, the greenback has turned into a proper fiat currency, one backed by, in absolute terms, nothing but the faith in it and the issuing government.

Even in fiat times, however, gold has its own value, albeit, of course, a diminished one. It is still used in various luxury industries, including, of course, jewelry as the number one destination for all the mined gold. Gold is also used in other industries, including dentistry (as dental filling) as well as electronics and computers (where it is one of the conductors of choice for various hardware). All this means that gold is ultimately a pretty safe bet for the nearest future unless a huge cultural swing dethrones it as the metal of luxury.

Investing In Gold

In terms of investment, gold is also relatively noteworthy – as the engine for diversification for pretty much any portfolio. Conventional wisdom advises to keep up to 10% of the funds invested in gold, but no more than that. The reason for that is that while gold does not promise the same staggering returns as stocks do, it does allow one to offset the inflation, as it tends to slowly gain value against the dollar over time. It also works as a good hedge against sudden swings in the strength of the mighty dollar, as it demonstrates a negative correlation with the dynamics of its index. In other words, gold tends to go up when the USDX goes down, and vice versa. This also leads us to assume an indirect negative relationship between gold and US interest rates: as a general rule, higher interest rates mean a stronger national currency, and a stronger dollar leads to weaker gold.

Furthermore, gold has an interesting relationship with the stock market. Whenever the market is going under, investors panic and seek to pour funds into assets that have real, hard value, as opposed to being dependent on the sales, consumer sentiments etc. In these times, gold, quite understandably, goes up, as a commodity that delivers exactly that. This relationship can be seen on the following historical graph, which tracks gold price against the dynamics of the S&P 500 index.

(Data from: datahub.io, Yahoo! Finance)

All this leads to a simple conclusion: the answer to the truly Shakespearean question, to hedge or not to hedge (through investing in gold, of course, in our case), depends on a few other more or less straightforward questions.

Question One is whether the stock market is calm or volatile. If it is volatile, you can safely bet on a bullish gold price forecast to come to fruition, and if things are going smoothly, gold is unlikely to be picking up the pace. Question Two is the state of the dollar, and, by extension, of the United States of America as an economy and a great power on the global scene. The latter, as we can see, is not just a matter of figures along the lines of US job market growth (although this, of course, is very much a factor), but also of all things political and international, as they also have the capacity to impact or affect dollar’s strength.

Gold Price Forecast: When Uncertainty Is Good News

Right now, we can see gold rising on the back of report a new report on the current state of the US labor market, which saw fewer than expected jobs added in May, and the wages lagging behind their expected growth. These signals cast some shade on the current state of the US economy, triggering investors’ fears of a waning momentum and expectations of an interest rate cut by the US Federal Reserve. This dragged the greenbacks’s strength vis-à-vis other major currencies down, which, in line with the trend we have noticed before, has allowed gold to rally to the highest level since April 2018.

The strength of the dollar and, by extention, the outlook for gold to a large degree on the decisions made here. (Source: Pexels.com)

Also playing into this are President Trump’s remarks aimed at the Fed, calling upon it to lower the interest rates to bolster Washington’s odds as it faces off with China in a trade war. According to the President, an interest rate cut and the weaker dollar it brings along would come as a boon to the US economy, making US exports more attractive and thus helping bolster the labor market.

Furthermore, the US-China standoff could be one of the most important things for everyone considering investing in gold to look into. First, this long-running crisis has sent the stock markets reeling more than once, May 2019 being one of the most recent examples. With the uncertainty set to continue, at least in the short term, it is reasonable to expect more shockwaves to hit the stock market, which could bolster the positions of the royal metal.

Obviously, the standoff can also throw the other part of the equation off-balance – that is, impact the status of the US dollar as the predominant currency for international trade. With the US being one of the most prolific users of financial sanctions to pressure rival regimes (currently, it has restrictions in place against over two dozen states) and its newly-acquired taste for protectionist trade policies, the dollar is now somewhat less attractive as the currency for cross-border trade. Thus, it is no surprise that some nations have been mulling alternatives in various sectors and areas – such as the EU, for example, which has recently taken steps to undermine the dollar and promote euro for trade in energy.

These factors can also affect the dollar’s status as the go-to currency for financial reserves. Here, the greenback is also facing increased pressure from the euro as well as Chinese yuan, which was added to the IMF reserve basket in 2016. Should more countries turn to alternative reserve options, the greenback may take a beating, which, as we noted earlier, is set to be good news for those investing in the precious metal.

All this leads us to a bullish gold price forecast. We believe that in the times of friction and uncertainty, investors are likely to fall back on the time-proven hedge tool, and so, the gold price is about to rise. This assessment is somewhat backed by the forecast from the I Know First algorithm, which expects the gold to see moderate growth over a one-year period with a solid predictability score of 0.53. This gold price forecast suggests that the commodity is likely to see moderate growth over the course of the next 12 months.

Conclusion

We do not see too much room for optimism in regards to a quick and comprehensive resolution of the US-China tensions, as we think that the conflict is ultimately about the fundamental values and visions underlying each of the societies. Thus, it would be unreasonable to expect those to be resolved quickly and once and for all, whether through negotiations or trade wars. Furthermore, we see the dollar as following a course to a territory of uncertainty, with its dominance challenged across the globe. All this could end up leading to a surge in gold prices. Thus, if you have not got your 10% of gold (ideally, mixed with other commodities) hedge in the portfolio, now is probably a good time to do so.

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Please note-for trading decisions use the most recent forecast.