Inflation, interest rates, and oil prices are said to be some factors that can supposedly influence the movement of gold prices. However, it's just a myth.

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NM Rothschild, Founder of Rothschild & Co. and Bern Bernanke once said that no one could ever understand the true value of gold. Despite those major financial big fish outlook on gold price, many people push their luck by predicting where the precious metal price would end up.

As of now, these expensive metals still continue to dominate safe haven market. The question is, How long will it last and what make it lasts?

There are seven factors that are believed to drive the price of gold in the market:

  1. Inflation
  2. Interest rate
  3. Stock market
  4. Geopolitical conflict
  5. US Dollar
  6. Oil price
  7. Asian market demand

However, the above 7 factors have been proven to be mere myths that have widely circulated in society and are mistakenly believed to be true.

So, what is actually controlling gold price movement within immediate future?

 

1. Inflation

Gold price soared by 18 folds in the 70s when inflation sky-rocketed to highest record during post-war peace period. 20 years later, even though inflation has receded, gold price continued to rally.

Study regarding 12-months correlation between gold price and US CPI during past 45 years showed result at 0. Meaning that there's no correlations between those two variables.

 

2. Interest Rate

Gold doesn't yield it's investor a return in form of interest. Consequently, everyone who is buying it will miss chances on profiting from interest rates that may come from investing in local currencies.

This financial hiccup is called as opportunity cost of precious metal. The higher current rate is, the bigger opportunity cost will be.

So, you'd think that while interest rate is high, gold price will dip? No.

There's no clear correlation between them. Recurring history stated that those aspects only moves contrary to each other occasionally, both moves toward the same direction more often than not.

 

3. Stock Market

As it was with interest rate, gold price occasionally moves in the opposite direction of stock market. However, study of 12-months between gold price dan S&P 500 indices during the past 45 years shown result at 0, i.e., nada.

Why so? Many investors glitter up (pun intended) their portfolio with this precious metal as well as it supports balanced risk/reward.

 

4. Geopolitical Conflict

Gold price infamously soared to USD 850 in 1980 when Soviet Union invaded Afghanistan, at the same time there was mass-hostage attempt in US Embassy on Tehran, Iran.

Moreover, gold price sprung to USD 1,920 in 2011 when Arab Spring revolution turned into civil war, Greece fell into economic recess, and mass-riot broke out in England.

It's very likely that speculators would skew gold price during those critical moments as a safe haven investment, even though it wouldn't last for a long period of time.

Such as when gold price inclined by 12% during the first two weeks of Falkland crisis in 1982, resumed to bearish trend, and in the next month plunged to 3-year low.

 

5. US Dollar

Generally, every natural resource commodity is quoted in US Dollar, therefore prices commonly fall when USD gained. However, it doesn't always happen.

Gold price will rise whenever USD is weakened. Historically, the chance of aforementioned occurences are about 60%.

Moreover, market movement may differ when Gold is quoted in other currencies. In the last 27 months since 2004, gold price in GBP (Poundsterling) quotation has raised by 5%; dan within 21 months of it USD was also rallying against GBP.

 

6. Oil Price

There's popular belief pertaining to correlation between gold price and geopolitical conflicts. Therefore, people predict parallel direction of gold and oil price.

Since 1986, there has been 60% of such occasions, which is more reliable than laterally sticking gold price to stock price or interest rate.

But, there's an exception. When financial crash struck market, crude oil price fell sharply by 80% in second semester of 2008.

In the same time, gold only slipped briefly and returned to bullish rally from then onward, as recorded by 235% increase within the last 10 years up to July 2014.

 

7. Asian Market Demand

When gold price declined by 30% against general currencies in 2013, mainland China became the biggest gold buyer in the world. A year after, within early 2014, gold demand decreased by 20% (YoY).

Henceforth, rising gold price is somehow folowed by increased Asian market demand. However, further inspection showed that the opposite is more likely to happen.

As so, gold price sloped down to 3-year lows in spring 2013, just when India recorded their biggest gold import, even though India was the center point of global gold demand (now replaced by mainland China).

Thanks to gold futures, physical gold transaction no longer dictates market price. That's because many investor liquidated their other asset such as stock shares and property to buy gold in commodity future market.

This new breed of market has been the main driving force of gold price in 1970s to 2000s.

 

Final Thoughts

If all those seven popular myths doesn't actually stand to it's alleged reliability. So, what is actually driving the gold price? Well, it's rather simple, there's no single-most reliable factor. In fact, you have to consider combinations of those factors when predicting gold price direction.

Worthy of note, lasting trend of gold price reflects condition of other, more lucrative and riskier financial instruments. People viewed gold as a form of insurance, while insurance price is at it highest when we need it the most. Generally, gold price will continue to rise if other financial instruments performed worse.

In another word, that's why gold has become safe haven, so whenever financial crash jump-scared investors, gold will shine the brightest (and more investor craving for it).

 

In order to trade gold freely, traders are advised to seek for the best broker for gold trading. Luckily, there are plenty of broker offering low spread gold trading service nowadays.