Gold is one of the most heavily traded commodities in the US, and as such is affected by many factors in addition to typical supply and demand fundamentals. Those factors include general economic sentiment, interest rates, inflation, exchange rates, political instability, monetary policy, prices of other commodities, and a host of societal attitudes towards the yellow metal, such as ever-changing tastes in jewelry.
Over the past three months, the spot gold price has fluctuated from a low of $1,128.20/oz in December to a high of $1,256.90/oz in February. On March 10, the price hit a five-week low. Gold’s current pullback is likely reflective of the anticipated 0.25% FOMC rate hike this week, which the CME Group’s estimate has a 90.8% probability of occurring. Furthermore, the tumbling crude oil price may have been dragging the entire commodity complex – including gold – lower.
Despite this, the long-term fundamentals for gold remain overwhelmingly bullish. Simply put, an imbalance of supply and demand will likely outstrip economic, political, and other indirect factors to put tremendous upward pressure on gold prices. Below is a quick summary of the three factors expected to exert the most influence this year:
The Shari’ah gold standard: The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), in cooperation with the World Gold Council, published in November 2016 a new shari’ah standard for trading gold. The AAOIFI is similar to FASB, as it creates accounting, auditing, governance, ethics and Shari'ah standards for Islamic finance. Given that nearly a quarter of the world population is Muslim and that residents of the Arabian Peninsula are particularly affluent, the potential for a rising demand in gold is enormous.
The Shanghai Gold Exchange’s (SGE) new contract: In April of 2016, the SGE launched a new renminbi-denominated gold contract, in a move that Marwan Shakarchi, Chairman of MKS (Switzerland) SA, described in an interview with CNBC as a move that “will help both consumers and producers in this part of the world.” This is particularly noteworthy, as the world’s second largest economy has seen significant growth this year. In short, as Shanghai begins to compete with London and New York as a major gold market, it will introduce further liquidity in a third time zone, which could create significant amounts of new demand for the precious metal.
Peak gold supply: On the supply side of the ledger, calls for “peak gold” are increasing. Peak gold is the point at which global gold extraction has reached its maximum, and in 2014, Chuck Jeannes, CEO of the world's most valuable gold miner Goldcorp (TSE:G), made the claim that peak gold would be reached in 2015. "Whether it is this year or next year, I don't think we will ever see the gold production reach these levels again," Jeannes said. "There are just not that many new mines being found and developed." The World Gold Council notes that as of 2015, the global supply of gold was 66% recycled and only 34% from mining, so whether or not we have actually hit peak gold, new supply does appear to be leveling off.
As a reminder, those interested in investing in gold may see further short-term to medium-term volatility as worldwide geopolitical and financial uncertainty seems to persist in 2017. Yet, as it happens in almost all markets, the supply and demand fundamentals will push through the turmoil presently depressing the price of gold. Investors who take advantage of gold’s current buying opportunity now are likely to see the biggest gains.