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Recently, gold has been making the headlines. The weakening of the pound, the plunge in equities, the uncertainty around property and the lowering of interest rates have all resulted in investors flocking toward the precious metal. Amid the uncertainty, investors see gold as a safe haven for their money.
Spurred by Brexit fears both in domestic markets and across Europe, the gold price has tested new highs recently surpassing the $1,350 an ounce mark. This is the highest price achieved by the commodity in two years. Alongside Brexit, the momentum in the gold price has been powered by global uncertainty with question marks looming over the US and Chinese economies.
At the time of writing, I hold a long position on gold. In times of such uncertain, gold serves as a valuable hedging mechanism. Typically when the markets are down and the economic outlook unclear, gold will prosper. However, the reverse is similarly true. If the economy recovers quicker than expected, then the new highs achieved by the precious metal will quickly evaporate.
The key to the gold price going forwards will be pinned to the US economy. The strength of the US dollar is commonly symbolic of the state of the US economy. A weak dollar results in strength in the price of gold. With US GDP weakening in previous quarter this has impacted the strength of the dollar and in turn buffed up the gold price. The cooling of any potential interest rate hike by the Federal Reserve has also helped the commodity. If the US economy continues to stutter, this could see further highs for the price of gold.
With the gold price hitting 5 year lows at the beginning of 2016, this could be the beginning of an upward surge. The fortunes of the precious metal may be about to change. Like with oil, the famous adage “the cure to low prices is low prices” is beginning to carry some truth. The lower prices puts pressure on the gold miners, who cut back production. However, over a period of time, lower prices encourage demand, but with the reduced production this squeezes the market and forces prices higher.
The alienation of gold over the last 5 years will have inevitably created shortage in the production. In the early months of 2016, the price of gold began to bounce of the record lows indicating that momentum was beginning to change. Given the shock Brexit result, the demand of gold as trusty security in times of major economic uncertainty will have significantly increased. As a result, I am very bullish on gold and think it could have major potential upside in the coming months.
Author Bio: Trader Tim is a writer for a number of financial publications including ADFVN, TradeSignaller and 7circles. He also writes for his own blog, Trader Tim’s Diary, which includes trading thoughts to help other traders learn from his successes and failures. He donates 10% of trading profits to charity at the end of each month. He can be reached via Twitter at @TraderTim5.
