By Afrasiab Mian/Zacks
Ah yes, gold, the resource that people have killed each other over for centuries. Okay wait, maybe those days are over, but it’s still a relevant resource. In the first half of 2016, this commodity gained over 25% in value, but why?
Well first, let’s make sure we have a grounded understanding as to how gold works and what impacts price for the yellow metal. Investors must consider several factors—pricing, macroeconomics, and supply/demand—in order to understand gold’s performance. Then, and only then, can investors grasp how gold has managed to finally break out of its multi-year malaise and soar to fresh heights in 2016.
There is a lot of debate over what exactly impacts gold prices, but the reality is there is no simple answer and that several factors influence the metal’s price. Some believe in a negative association between interest rates and respective gold price. As our team points out, laws of supply and demand coupled with high volumes of purchasing in ETFs such as GLD and IAU play a major role as well.
Generally speaking, most commodities are priced in dollars. So if for example the U.S. dollar UUP is strengthening, this means that it takes less currency to buy a given product, including commodities. Because of this, the price of these commodities then falls, although as the recent positive performance of both the dollar and gold has shown us, this isn’t always the case.
Throughout history, gold has had a reputation as a “safe-haven.” This is due to the fact that it has intrinsic value and cannot be manipulated by the policies of any government in particular. When the market goes south, investors can run away into gold assets and wait for the storm to blow over.
Investment in gold has jumped 122% since this time last year, with ETFs and similar products undergoing an over 300% jump. More people buying gold means less gold on the market, and that coupled with high demand raises price.
As of May 11th, nearly $9.4B worth of investments have gone into GLD and IAU, which considering these ETFs had significant outflows these last two years signifies a huge shift. The World Gold Council reported that global gold demand grew at its fastest pace ever, with growth of 21% year-over-year in Q1.