Investor confidence in the global market seems to be reviving. These days we are witnessing improvements in consumer confidence, employment, spending, output, capital market performance and almost every area of the global economy. The demand for gold that sharply decreased last year owing to a number of factors is rising again. The gold market, unlike any other market, once affected adversely takes some time to recover. Gold entered into the recovery stage in 2014 after a sustained turmoil which began in 2013. Now, it seems that gold is all set to stage a comeback.
The gold market collapse of 2013, sometimes referred to as the Great Gold Crash, can be attributed to a number of factors. The cardinal reason behind the gold crash was reduction in the demand of the mineral in certain parts of the world, especially in China. China over-purchased the shiny metal in 2013, which proved not to be a financially beneficial decision. The year was marked with low investor confidence. Skepticism arose as to the future prices of gold rise while the market began to disinvest.
The year 2014 was marked with many highs and lows. The market began showing some signs of life. It was the year of stability, following a year full of pessimism regarding the prospects of gold.
It is generally argued that gold is inversely proportional to the rate of interest and that the cost of holding it is greater than the return it generates. But we have sufficient reasons not to believe in these widely held notions. Today in many countries, central banks are following the policy of maintaining interest rates at zero or negative. The policy of keeping interest rates at zero is known as Zero Interest Rates Policy (ZIRP) and the latter is known as Negative Interest Rates Policy (NIRP). With ZIRP and NIRP being followed by many countries globally, the edge that holding cash once had over holding gold is fast disappearing. Events, like the global financial meltdown of 2008, make holding gold over cash seem more lucrative. With interest rates expected to decrease in the short run, we have ample reasons to believe that investors will keep showing confidence in the shiny metal.
Gold and risk assets such as stocks and bonds are negatively correlated with each other. An increase in one causes the other to decrease. Bonds and Equities have an inverse relationship with interest rates. Even if interest rates in the U.S. increase, investors have nothing to worry about, as it will cause the metal demand to spike.
Gold prices are rising. From $1,150/ounce in March 2015, the item increased to $1220/ounce this month. Increased Gold prices not only increase the return on investment but also help cover transaction, holding and insurance costs.
Investment in bar and coins are not expected grow at the rate we witnessed before the Great Gold Crash; still 1,000 tons of gold are expected to be stockpiled this year. Gold consumption in the form of jewelry will continue increasing. Owing to the decline in energy prices, official sector purchases will remain low. Buying of gold in Asian markets will continue on the increase as well. Average metal prices for the remainder of 2015 are expected to remain at $1,170/ounce and an expected increase might occur in 2016, which will bring it to $1,250/ounce.
Still, analysts are predicting that since gold is not showing much promise in 2015, going into 2016 and moving towards 2020 investors will see a better turn around for the item. As inflation continues to become a global threat, gold could very well begin to look more lucrative and sellers of the precious commodity might start making high profits from its sale.
Meanwhile on the stock exchange as investors continue to show signs of weariness with the market, some are hoping to see an increase in gold stock companies and they continue to hope to see some good enough dividends coming to them at the same time. While the price of gold is not rising, gold companies are still holding their own by mining as much of the precious metal as they can find.
The environment of hope and confidence that is influencing almost every market and industry favorably is believed to have a positive impact on the gold market as well. Across the board growth represents a necessary condition for complete and sustainable economic growth.
