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Alberto Abaterusso
Alberto Abaterusso
Articles (1297) 

What Impacts the Price of Gold?

The DXY is a good predictor of the gold price

May 09, 2018 | About:

Gold closed at $1,314 per troy ounce on the London Bullion Market on May 8. The yellow metal is up nearly $7 per troy ounce or plus 0.54% since the beginning of the month.

Compared to the average of the first quarter, the bullion is down $15.28 per troy ounce. The yellow metal averaged $1,329.28 per ounce in the early months of the year, a 9% increase from a year ago.

The price of the precious metal was determined mainly by two factors:

  1. The U.S. administration wants to keep the value of its currency low in order to promote the export of American goods and services.
  2. The total supply of the yellow metal is in surplus.

There is an inverse relationship between the U.S. dollar, the independent variable, and the gold price, the dependant variable. The negative relationship is nearly directly proportional. When the U.S. currency is down, the gold price is up, and vice versa. As you can see in the chart below, the coefficient has a t-stat of -6.55 (inferior to -1.96), which means that the relationship is statistically significant at a 95% confidence level:

Source: Investing.com

Daily gold prices have regressed against the U.S. dollar over the first quarter of 2018. Gold Futures have been considered as a proxy for the precious metal. The coefficient of multiple correlation says that about 63.4% of the gold price is interpreted by the U.S. dollar. This means that if other variables, such as the S&P 500 index, are added to the analysis, the model will likely improve.

It is an inverse relationships because the purchase power of the currencies of other countries increases when the U.S. dollar depreciates. The demand for gold and the price of commodity increases.

Furthermore, gold is one of the alternative forms of investment for investors to protect the value of their wealth from a declining U.S. dollar.

The inverse relationship can also be appreciated in the below chart:

Source: Investing.com

The price of the precious metal rose. With a volume of 1,063.5 tons of gold, a 3% increase year-over-year, total supply exceeded total demand of 973.5 tons. Of the total supply, mine production was approximately 72.4%. The World Gold Council said the higher supply is due to "a modest increase in producer hedging.".

The demand for gold decreased 7% from the first quarter of 2017 and was the lowest over the last 11 first quarters.

Because of range-bound gold prices, which hurt investors’ interest, investment demand for the gold bars was at 254.9 tons, 15% lower than the comparable of 2017. That decline, together with a fall in demand for gold-backed Exchange-Traded Funds, caused the drop in the total demand of the yellow metal. With inflows at 32.4 tons, ETFs went down 66% compared to the first quarter of 2017.

Chinese holiday spending and improved U.S. demand didn’t move the demand for jewelry. Globally, consumers bought jewelery for a total volume of 487.7 tons. That was approximately the same level as a year ago.

In the first quarter of 2018, central banks amassed about 116.5 tons of gold, up 42% from the comparable of 2017 to worldwide official reserves. That marked the highest level of official global reserves over the last four, first quarters.

The wireless sector was the main driver for the higher demand for gold in the technology sector. Demand increased 4% year-over-year to 82.1 tons.

(Disclosure: I have no positions in any security mentioned in this article.)

About the author:

Alberto Abaterusso
If somebody asks what being a Value Investor means, Alberto Abaterusso would answer: “the Value Investor is not the possessor of a security that represents the company, but he is the owner of that company. As an owner of the company the Value Investor is actively involved in the dynamics of that company and his first aim is how to have sales progressively growing.”

Alberto Abaterusso would add: “probably the Value Investor is one of the least patient persons in the world concerning sales.”

Alberto Abaterusso is a freelance writer based in The Netherlands. He primarily writes about gold, silver and precious metals mining stocks. His articles have also been widely linked by popular sites, including MarketWatch, Financial Times, 24hGold, Investopedia, Financial.org, CNBS, MSN Money, Zachs, Reuters and others. Alberto holds an MBA from Università degli Studi di Bari (Italy), Aldo Moro.

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