If you’ve been part of FMP for a while you would have heard us say gold is a traditional ‘safe haven’ or even that gold is not ‘behaving like it traditionally does. This week I thought I’d give you the results of some research I’ve been doing recently on gold and what helps determine gold’s price. Below I list a couple of factors;
Industrial Demand. Gold is an extremely desired commodity. Approximately half of the world’s demand for gold is used for jewellery. Another large percentage of the demand for gold is used for technological and industrial purposes. The price of gold can thus be driven by the simple theory of supply and demand.
Gold as a “safe haven”. During difficult times such as an economic recession or uncertainty, many investors invest in gold due to its everlasting value. When the price of bonds, equities, and real estate drops, the interest in gold rises, fuelling a higher price. Gold can be used to reduce the risk of inflation or currency devaluation. Gold is also regarded as a provider of protection during times of political instability.
Production. Mining gold is an expensive procedure due to gold being a rare commodity and therefore precious. Since 2012, there have not been any significant discoveries of new gold deposits, therefore minors now have to dig deeper to find more gold reserves. This challenge causes more issues: miners being exposed to more hazards as well as the environmental impact. So.. it is more costly to extract less gold. These factors increase the costs of mine production, which can result in higher gold prices.
Central Banks. Many nations from around the world hold reserves such as these that mainly consist of gold.
The value of the US Dollar. Since gold is a dollar-entitled precious metal, its cost per ounce is immediately influenced by the value of the United States dollar. So, a stronger US dollar tends to keep the price of gold lower, and vice versa-when the value of the US dollar drops it’s likely to cause the price of gold to increase.
Inflation. Inflation or the increasing price of goods and services is another factor that can influence the price of gold. Rising levels of inflation tend to drive the prices of gold higher, on the other hand, decreasing levels of inflation cause the prices of gold to drop. Inflation is mostly a sign of economic prosperity. When the economy is thriving, it’s customary for the Federal Reserve to expand the supply of funds. Expanding the supply of funds weakens the value of each existing banknote in circulation, making it more costly to acquire assets that are considered valuable, such as gold.
In other news, a better picture of the European Central Bank’s intentions for future interest rate hikes has backed the euro and appears to be a key factor in current & further price development. The only debate seems to be whether the ECB will start raising interest rates by 25 basis points in July or 50.
The Forex News Week Ahead
A pretty quiet week on the news front this week, but watch out for interest rate news from Australia on Tuesday (GMT) and Europe on Thursday. If you do trade on Friday things get a bit busier with Canadian employment and US inflation releases.
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EUR/USD: Bias is only to short. A grade for me is the 1.11500 area. On the smaller timeframes look for the 1.07900 zone.
USD/CHF: Only want to long. Interesting area where it is now, but no reasons for the stop. Need a bigger pullback to the 0.94800 area
GBP/USD: I only want to short. A grade short from 1.3200. On the smaller timeframes look for 1.2670
AUD/USD: Range getting tighter now, but still looking to short from 0.7280
NZD/USD: Looking to short from 0.67500 as an A grade. On the smaller timeframe look for 0.65600
USD/JPY: Still not interested in this pair at the moment. 118.00 is where I’d start looking again.
USD/CAD: Broke deeper than I thought, but I’m still looking to long. 1.25300 on the smaller timeframe still interesting.
EUR/GBP: I’m looking at the 0.8500 to 08600 range.
GBP/AUD: A grade short from 1.8200. On the smaller timeframe 1.7800 looks interesting.
AUD/NZD: 1.06900 for a long for me. I would also look to short from around 1.1200
AUD/CAD: Short from 0.92000
EUR/CAD: Looking tot short. Smaller timeframes look at 1.3700. A grade though back at 1.4200
NZD/CHF: I’m watching the 0.6300 area for a short.
GBP/NZD: Short from around 1.9500
GBP/CHF: I’m looking to short from around 1.23400
YENS: Still too far away from anything in order to trade with the trend.
As always, remember correlation!
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Watch the video below for more detailed explanations of this week’s analysis and trade plan (click the 4 arrows bottom right to view full-screen: