Gold prices are affected by a multitude of factors, and potential investors looking for gold exchange traded funds (ETFs) should assess what they include.
The main factors that are often cited include worries that China will raise key rates, no set policy on how to halt currency manipulation, gold speculation and volatile equity trading , writes Alix Steel for NuWire Investor. [4 Ways to Get Gold ETF Exposure.]
However, there are other factors to consider, says Steel.
- Price manipulation. Some gold bugs argue that the price of gold has been artificially suppressed by global Central Banks and governments. Under the Washington Agreement on Gold, Central Banks may only sell up to 400 tons a year, which would restrict the amount of gold in the open market. But the Gold Anti-Trust Action Committee, or GATA, contends that missing gold has been secretly dumped into the market to prevent prices from rising to its actual price of $3,000 to $5,000 an ounce – this argument has been spearheaded as silver recently came under fire for price manipulation.
- Supply/Demand. Analysts have argued that above-ground stock growth of gold is only 1.75% per year and demand is expanding beyond that. The World Gold Council reported that total supply of gold actually expanded 18%, which is more than enough to cover demand, and recycled gold in circulation grew by 41% as consumers sold on high gold prices. Increasingly, physically-backed gold ETFs are buying a larger proportion of gold to satisfy the amount needed to cover the funds’ portfolios. [The Physical Gold ETFs Go Head-to-Head.]
- Peer pressure. More investors are starting to allocate a proportion of their wealth into gold. Percentage can range from 5% to 20% depending on the investor, but most still don’t own gold, which gold bulls argue will result in a spike in gold prices when those investors do enter the market.
- Currency swings. Holding gold is a good hedge against inflation – gold maintains its wealth as currencies depreciate. Gold historically has an inverse relationship to the dollar, but during riskier market environments, the dollar and gold have both been purchased as safe-haven assets. Still, some experts believe that gold will also perform during deflationary periods, too.
- Central Banks. Double-digit gold price movements usually means that large buyers and sellers, such as Central Banks, have entered the market. As of 2009, emerging market Central Banks have been buying up gold. Developing countries are rebalancing as their gold reserves have fallen short or looking to diversify away from the dollar. Central Bank decisions aren’t usually affected by the price of gold.
For more information on gold, visit our gold category.
- SPDR Gold Shares (NYSEArca: GLD)
- iShares COMEX Gold (NYSEArca: IAU)
- ETFS Physical Swiss Gold Shares (NYSEArca: SGOL)
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.