It is well-known that gold has an inverse relationship with the economy. When the economy is doing well, gold prices tend to fall, and vice versa. This is why gold is oftentimes used as a “rainy day” investment, meant to serve as a safe haven for when the economy takes a downturn. The state of the economy can only be measured by certain indicators, of which there are an overwhelming amount, and they can be interpreted in many different ways. One analyst may say one thing while another says almost the opposite, and it can become confusing at times. However, investor sentiment on how the economy is doing can usually be seen in the markets. In addition, it is not just the economy at home that receives attention. Gold is also influenced by factors on a global scale, reacting to wars, sanctions, currency crises, etc. from far and wide. Investors are forced to weigh these many concerns against each other and make decisions based on which ones they believe are the most salient at the time.
Currently, judging by the latest market trends, investors seem to be strongly weighing a handful of indicators pointing to a stable and improving economy, while less heavily weighing other concerns that may signal trouble. Below are five of these weights that have been receiving a great deal of attention and subsequently bringing down the price of gold.
1. The Strengthening U.S. Dollar
In just a short time between September 1-10, the U.S. Dollar Index, which measures the value of the U.S. dollar against other major currencies, has jumped from 82.75 to 84.28. As we’ve mentioned before, gold is bought and sold in U.S. dollars, therefore a stronger dollar lowers demand as gold becomes more expensive for those using other currencies.
2. U.S. Manufacturing Sector
The Manufacturing Purchasing Managers Index , or PMI, measures business conditions in the manufacturing sector of an economy. A PMI above 50 signals a growth in business activity within the sector, while below 50 marks a shrinkage. Thus far in 2014, the PMI has been above 50 every single month. Manufacturing activity in August was also the busiest since April 2010, according to PMI data from Markit Economics. A healthy manufacturing sector is a sign of a healthy economy as a whole and tends to help further strengthen the dollar.
3. Possible Interest Rate Hike
Considering how much improvement the economy has shown so far, the Federal Reserve is expected to raise interest rates some time in 2015, possibly early in the year if the recovery speeds up. Investors have been watching this indicator in particular like hawks. The popular opinion is that higher interest rates lead investors to turn to interest-bearing assets that benefit from higher rates, although other experts disagree and historical data shows otherwise.
4. European Central Bank Activity
The European Central Bank recently cut interest rates and announced a new bond-buying (commonly known as “quantitative easing” or “money printing”) program in effort to speed up economic growth. The Eurozone is currently experiencing low inflation, which can be just as dangerous as high inflation. Gold typically benefits from such announcements as investors seek a hedge against currency devaluation, but investors are more heavily weighing the fact that it will likely weaken the euro and in turn further strengthen the dollar.
5. Easing Geopolitical Concern
With ceasefires in effect in both Ukraine and the Middle East, geopolitical concerns have been calmed for the most part. Economic concerns have also seemingly been taking more precedence in the minds of investors. Less geopolitical concern means less demand for gold as a safe haven asset.
While right now may not seem like the best time to buy gold, remember that gold is meant to function as a store of value rather than an asset that pays dividends. It is possible to profit from buying and selling gold, but with the amount of short-term volatility present, this can prove to be very frustrating and time-consuming. Gold bugs often tell investors to “buy gold and wait” rather than wait to buy gold. It’s impossible to predict when the economy will take its next downturn, but wouldn’t you want to be prepared anyway? Gold can give you peace of mind that your wealth and purchasing power will be protected should something go wrong and pose a threat. You can even purchase it using your retirement account through opening a Gold IRA. Call American Bullion today at 1-800-326-9598 to speak with an agent about adding physical gold and other precious metals to your retirement portfolio. Invest in something real.