“Gold”, in leman terms is a substitute for money. It also bears a lot of significance, especially in the South Asian region, both as a saving and forms of wearables. Ownership of gold has a great influence on prestige and social class of individuals, especially in Asia.
The other as aspect of gold is its significance as a commodity, in the global investment and trading community. Historically, there have been arguments for and against investing in Gold. Warren Buffett, the oracle of Omaha has this view,
“I have no views as to where Gold price will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot – and it’s a lot – it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that.” The premise of the above quote is very simple and straightforward. Gold has its limitations to generate value and growth as opposed to equity investments. For example, if someone buy’s 1000 shares of John keeles today, there is reasonable certainty of dividends for the shares. Further, the investor also has the opportunity for wealth creation in the form of bonus shares and right issues that the company may decide to reward to its investors. And of course there will be capital gains in the value of shares over time. Hence, it provides multiple sources of wealth creation.
On the other hand if someone buy’s 100kg’s of gold today, it will remain to be the same in ten, twenty or hundred years. The only form of wealth creation comes from capital gains in price, depending on the cyclical pricing of the commodity. Gold has traditionally been viewed as a “safe haven” investment or as a hedge against inflation.
Generally, three factors drive the price of gold overtime,
The global geo-political climate
Monetary policies of major central banks
The technical posture of price in the trading cycle
The objective of this article is to articulate the above three factors in the present global economic eco-system.
Gold price overview-
Gold prices rose in 2009, the year after the worst financial crisis since the Great Depression, gaining about 24% by year’s end. But much of the stage was set in 2008 for gold’s rise in 2009 – and for the next few years – when the global financial crisis was entering its darkest days.
To recap what happened in the last quarter of 2008, the U.S. Treasury seized control of mortgage lenders Fannie Mae and Freddie Mac in September 2008 and said it offered$200 billion cash injection for firms dealing with mortgage default losses.
The U.S. government began working on bailout plans in October 2008, which was the depth of the global financial crisis. At its December 2008 monetary-policy meeting, the Federal Reserve took several actions to stabilize markets and the economy. First, it voted to reduce the Federal Funds target to a range of 0% to 0.25
Second, it formally launched its first round of quantitative easing in December, saying it would buy up to $600 billion in agency mortgage-backed securities and agency debt. At the March 2009 Federal Open Market Committee meeting, the Fed further expanded its balance sheet by purchasing an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to $1.25 trillion at the time. Richard Baker, editor, Eureka Miner, said the QE program helped to put a floor under gold, and really all asset prices.