Gold and silver had a pretty miserable end to 2015, with gold dropping to a little over $1,000 an ounce and silver hovering around $14. It was bleak, to say the least, and while many were predicting a turnaround, it seemed that just as many others were predicting more stagnation and even more of a fall.
Going into 2016, that changed, and significantly so. In fact, from its 2015 low, the value of an ounce of gold climbed nearly $300 higher, while silver made a push for $18 and fell a fraction short. So, what happened? Where did this rise come from and what are the reasons behind it?
When the US dollar falls, precious metals rise. That’s because precious metals have a very close relationship with the dollar, as indeed do most commodities. This began back when the Gold Standard still existed and the value of a dollar was tied to the value of gold, but it continued when gold moved to floating exchange rates, at which point it became very susceptible to the fluctuating value of the dollar. Simply put, when the dollar drops, gold goes up, and when the dollar increases, gold drops.
When the dollar struggles, the value of other global currencies increases, thus increasing the demand for gold, which is traded in dollars. And for anyone who has invested in the dollar, gold provides a reliable alternative when the value of the dollar is plummeting. The same applies to silver and platinum. Both of these metals also experience increased demand when the dollar drops, and their value is closely tied to the value of gold.
In 2016, the dollar has taken several hits, and while it is still relatively strong in relation to previous rates, those hits have pushed many investors towards the precious metal markets.
Gold has always been viewed as an investment safe haven, a secure and stable way to invest your money when everything else is struggling. And because the stock markets have received one blow after another in 2016, gold has just continued to rise.
Oil has struggled to return to the heights of a few years ago, and while it is performing a little better than it did last year, it’s still languishing around $40 a barrel, and that’s having a negative impact on the markets. There has also been concerns regarding the future of the Chinese markets, and at the end of April, the Bank of Japan decided not to expand its monetary stimulus program, and the Fed decided not to change interest rates, which delivered more blows to global markets and gave the precious metal markets yet another boost.
What Will Cause a Hike in the Price of Gold?
Gold investors tend to profit when others do not, and that’s the beauty of precious metal investment. To all serious investors, gold is a hedge, something that guards against failures in other markets. To put it simply, the best outcome for the price of gold is for the stock markets to crash, the dollar to bottom-out and the world to be in disrepair. At that point in time, money has little to no value and we’re all forced back into a bartering system, and one when commodities with intrinsic value are the only things that are worth anything.
This is the extreme, but the best thing about gold is that it will also improve during every step that takes us to that extreme, and it will also improve whenever investors worry that we are heading towards it. In a world of uncertainty, a world where it seems that everyone is waiting for the next crash, the next recession and the next bubble, it’s perhaps no surprise that gold, the only safe, secure and reliable investment, is doing so well.