By: Frehiwote Negash –
It’s been a long time since we saw gold prices rise steadily. The last time the market witnessed at major jump in the price was in 2008-2009, a very difficult time for a vast number of Americans. To put in context, in September 2008, Lehman Brothers had just declared bankruptcy, the American housing market collapsed. Homeowners, thanks to sub-prime mortgages owed more to the banks than what their homes were worth. Major corporations such as General Motors, AIG, and Chrysler all lined up for bailouts from the American taxpayer while simultaneously firing millions of workers. There was an ongoing presidential race to replace the inept George W. Bush. Bush not only woefully mismanaged the American economy but sent the country into record debt. In what was the worst financial crisis since the Great Depression in the late twenties and early thirties, gold soared to new heights. Historically speaking, when there is a bear market in stocks, it tends to be quite bullish for gold.
Looking at the market, between 2002 and 2011, gold was consistently on the rise with double-digit gains on an annual basis. Yet, what goes up must come down eventually. The last three years have seen gold dropping off from its peak of $1900/gram in 2011. The question investors must ask themselves is if they are operating in a bear or bull market for gold. More importantly, investors have to consider the state of the American economy.
At the beginning of 2015, gold has steadily risen which leads many to suggest that the bull phase has begun for gold based on certain factors. Some of the factors that affect the price of gold are a weak American dollar, inflation, and low interest rates not to mention supply and demand economics. An increase in gold prices typically signals that the U.S. economy is struggling. There is also a correlation between oil prices and gold in where when one commodity suffers the other soars.
From 1931 and 1971, the dollar was backed by gold making it a valuable currency for foreign countries to own. Since President Nixon took the US dollar off the gold standard in 1971, the price of gold has been determined relative to its production and supply and demand forces. To this day, the US dollar remains the world reserve currency of choice but the collapse of the oil market in late 2014 might help explain the recent rise in gold prices. When investors feel wary about the state of the American economy, the rule of thumb is to invest in gold to safeguard from inflation and potential economic crises like in 2008. The general market sentiment is the low cost of a barrel of Texas oil will eventually damage the economy. It’s hard to determine with the recent recovery of the American economy and the oil price surge this week what is really the case. The slow but steady recovery of the American economy might prove to be sustainable in the long run and lead to a healthy economy.
Source: Midas Letter, Gold Resource, Forbes.com, CNBC, Business News Network