What Could Send Gold Prices Higher?

What Could Send Gold Prices Higher?

Since 2008, we have seen evidence of a consistent economic recovery both in the US and around the world.  These positive trends have some drastic implications for investors and those that are considering gaining exposure in precious metals.  In areas like stocks, the central benchmarks have risen to new record highs and those that are not already long equity markets might find it difficult to navigate the current market.  

“It is not easy to buy into stocks at such elevated levels,” said Rick Bartlett, forex markets analyst at Orbex, “so more traders have started to consider buying gold as a way to profit from the market valuations that are present now.”  And when we look at the most likely trends that will be seen through the rest of this decade, there is a strong case that can be made for why increased inflationary pressures could bring the price of gold back closer to its 2011 highs.  

Historical Trends

When we look back at the historical trends that have been in place for most of economic history, it becomes clear that gold prices tend to rise when consumer prices are growing.  Rising consumer prices can have a significant impact on the market as a while, as it can limit consumer spending and, by extension, overall GDP growth.  It can also lead to changes in central bank policy.  

But from an investor’s standpoint, the most critical factor is that inflation causes the value of your currency to drop.  Rising prices mean that is now requires more Dollars to pay for the same items, so the currency is in essence losing value against other commonly traded assets.  There are a few ways to protect against this (as it also reduces the total buying power of your savings account).  Another option is to simply buy gold, and this can be done through the purchase of gold coins, bars, or jewelry.  Other choices generally involve exchange traded funds that at backed by metals, like the SPDR Gold Trust ETF (GLD) and the iShares Silver Trust ETF (SLV).  

Directional Trading in Gold

Since precious metals are different than currencies, there is no way for your investments to be negatively impacted as a direct result of rising consumer inflation.  This essentially means that buying gold can be a great way of hedging your portfolio against inflation if this is the projected outlook for the broader economy.  It also means that the time to start buying gold is now, since there is very little reason to believe that upward pressures in consumer prices will remain at their long term lows much longer.  Add to this the fact that gold had one of its worst years on record in 2013

But mastering short term price fluctuations in the precious metals can be difficult, as there is a variety of factors that have the ability sway markets at any given time.  This is why it is generally a good idea to employ a trading method that relies on a few different standards before any real decisions are made.  This includes trading strategies that have at least some element of technical analysis, the study or historical price charts.   Trends in these areas have been positive over the last several weeks, as gold prices have benefited significantly from rising global tensions in areas like the Ukraine and Iraq.

All of these factors taken in combination make it an interesting time for those that are looking to establish short and long term positions in gold.  Over the long term, it is difficult to argue with the point that gold prices should be pushed higher by similar movements in consumer prices.  Those that are most bullish on gold and silver tend to cite the fact that no other hard asset has such a long history of working as a hedge against currency inflation.  And when we look at the current climate, we can see that there is really only one place for consumer prices to go.  These forces will act in bullish favor for gold, and continue into multi-year time horizons.