Gold… the magical yellow mineral that has been dictating the wealth of the world for millennia and, apart from many people trying to establish other stable investments, has remained one of steadiest long-term investments.
Making any kind of forecast or prediction is often seen as hokum or pish posh and there may be some merit to those labels.
There isn’t an off-the-shelf crystal ball that you can buy to see the future. Imagine if that were possible? There’d be plenty of gold to go around!
Contrary to popular belief, using statistical methods to analyse financial market trends can allow analysts to make informed “predictions” about the future movements of market instruments and commodities.
There are various underlying factors specifically linked to instruments which cause their values to fluctuate and this principle certainly applies to gold as well.
Though not an exact science, these tools can be used in attempt to mitigate a level of risk that is inherent in the investment game.
All investors will agree that risk management is the most stressful aspect of commodities trading and will welcome any help in lowering trade risk to a level that is acceptable to their risk appetite.
So where do we begin with this gold forecast? Fitting question! With so many moving parts in the investment game, it’s easy to get flustered with where start, what to watch or even when to move.
In the words of the wisest philosophers of our time: Let’s start at the beginning!
Introduction to Gold
Gold has to be one of the longest standard exchanges of value in history. Some say that its tenure is practically biblical.
Civilisations have historically held gold for a myriad of reasons and, most recently, it is the metal that we revert to in today’s economy when all our other wealth instruments fail us.
There are way too many investment options available in today’s world.
If you asked any financial advisor about where you should put your money, they would conduct an entire investigation on your life to better understand your needs and expectations to adequately advise on an investment solution.
At a minimum, they’d tell you that you’d need an investment whose growth would at least beat inflation.
Believe it or not, over the past 50 years, gold has been one of the top choices in achieving returns that beat inflation.
Investing in gold has become more mainstream in the sense that it has began to appeal to a wider variety of investors.
Investors now range from individuals to sovereign wealth funds and they operate in varying sectors of the market (emerging and established).
Ever had any investments that tanked horribly after you read some news headlines that there was some political unrest in a country that directly influences your returns? We’ve all been there…Overnight, years and months of patient growth disappeared!
Gold is one of those investments that’s not reliant on geopolitical and civil stability.
It’s almost as if the entire world has unanimously decided that gold has intrinsic value that many would like to pay for regardless of the condition that they find it in.
Whether you’re a novice investor or you consider yourself a maestro of the markets, portfolio diversification is a strategy that you have been told over and over and over again to adopt.
Hedging the risk in your investment portfolio can save you a lot of tears in the long term.
Many investors agree that gold is one of the best diversification options when it comes to adding some sense to your portfolio.
In terms of long-term growth and returns, it always steals the show.
It may be important to note at this point that you shouldn’t let your imagination run too far about how to get yourself some gold.
I know the typical picture that you may be getting is one of getting into an elevator with a hard hat, pickaxe and a headlamp and descending into darkness.
Depending on your background, you might also be imagining sitting on a river bed with a tin pan and sifting through some sand.
The good news is that the world has come a very long way and getting your hand on some gold has become much easier.
How do I invest in gold?
Here is a brief breakdown of a few of the available ways to get some gold for yourself:
Very easy to acquire with high mark-ups but doesn’t always have guaranteed resale values. It’s more likely that collector items will yield a return.
Available in many forms (most commonly Coins/Bullion). Allows you to tangibly own the gold but carries low mark-ups, requires physical storage and can have liquidity challenges
Most commonly available as mint certificates. These give direct exposure to the gold market but are only as good as the company that backs them
These instruments are highly liquid and provide direct exposure to the gold exposure. They do carry high fees and are only beneficial when the price of gold changes
Highly liquid instruments that allow you to hold a sizable amount of gold with little upfront capital. Unfortunately, these instruments are highly leveraged and the contracts carry time limitations
Gold Mining Stocks
Great for diversifying portfolio risk and they usually track gold prices. These instruments inherently carry the risks of the mining operations that they’re backed by
How much should I invest in gold?
Many traders often wrestle with the question of how much of their money they should invest in gold.
As with any investments, there are many factors which need to be considered relating to your personal investing needs as well as the underlying instruments being scrutinised.
Experienced investors will agree that your investment in gold should most likely not exceed ten percent of your total portfolio value.
Considering to include gold in your portfolio should be looked at from an objective of diversification as opposed to making huge returns.
Considering when to buy gold is also an important question to ask yourself.
The answer to that question needs to be driven by the return on investment needs that you have or are aspiring to.
Factors regarding risk profile, liquidity and long-term objectives should be considered as gold will pose certain limitations if it is matched with the wrong strategy.
Where does gold get its value from?
Now you’re probably wondering that this sounds all good and well but where does gold get its value from?
That is an interesting question and leads us back to a point that I raised a little earlier about the intrinsic value of gold.
Supply and demand are the main drivers for the valuation of gold and it ultimately drives its spot price.
Investor demand is normally inversely proportional to economic conditions. If economic conditions are bad, the demand for gold has been seen to increase as investors are looking for more security in the market.
If you already have some gold in your possession, the question that you’re most likely asking and have graciously arrived at this article is “What value change can I expect in my gold investment?”.
Forecast value of gold
The forecast value of gold is affected by a number of factors, let’s take a look at the primary ones that we should be watching to make some sort of informed projection.
The Almighty American Dollar
An interesting relationship exists between the US Dollar and the price of gold. When times of uncertainty hit the markets then we often see investors falling back on the dollar to find some consistency.
That being said, the relationship between gold and the dollar is inversely proportional, meaning that when one rises in value then other will decrease.
It’s hard to ignore the recent turmoil that’s been caused in the market because of the recent trade war between America and China.
Investor behaviour took an expected turn as the market showed that investor funds were moved out of US dollar holdings and into gold holdings.
The glaring conclusion that investors need to take note of is that if the US dollar price nosedives this year then there should be a considerable increase in the gold price.
The market index confirmed this relationship last year as the US dollar recorded its smallest ever move of 0.24% while gold increased by a whopping 18%.
Gold Prices and U.S. Dollar Correlation – 10 Year Chart
Physical Gold Investment Demand
Gold can be traded in many ways, most common of which is physical trading and as ETFs backed by gold.
The interest in gold has certainly spiked, as previously mentioned, because of investors objective to hedge losses incurred in other instruments and markets.
The past few years have seen the physical demand for gold be reasonably subdued but the investment demand for gold has recently surged and, when analysed over time, have shown a major uptrend.
These demands for ETFs are making sure that the valuation of gold is steadily rising and is most likely to continue to do so until investors find themselves in a position where they can realise their expected gains.
Buying of Gold by Central Banks
It’s not privileged knowledge that banks have physical gold reserves of their own. This has been common practice since 1965.
Analysing the trends for the past ten years shows the central banks of the world have been buying more and more gold year on year.
This strong uptrend, highest of which being 2019, is contributing to the rising value in gold.
A comment made by the World Gold Council states that though the buying of gold by central banks may slow, it certainly will not stop.
This is a confident sign to investors that the gold forecast is that the price should continue to rise.
Trading Volumes on COMEX
For those who aren’t familiar with the term COMEX, it is the leading commodities exchange for metals options and futures trading in the US.
Trends analysed on the COMEX have shown that gold buying patterns since 2016 have been strongly bullish.
In line with the basics of supply and demand, whenever you’re buying more that you’re selling, you can expect the price of the traded commodity to increase.
Tying these principles into the supply restraints on physical gold, it’s easy to see that all these instruments (backed by the same amount or marginally increasing) will increase in value.
New Gold Supply
Unlike normal products which can be manufactured, you’ve probably surmised that new gold supply is not just going to magically appear in a treasure box.
Mining gold is an incredibly expensive exercise and is predicated by the discovery of gold reserves.
That being said, this has a direct impact on the basic supply and demand principle.
With gold resources becoming scarcer and the demand increasing, a surge in the gold is the logical consequence.
Forecasting gold based on low supply
So, how do we know that the high supply of new gold into the market is going to be unlikely?
Check out these interesting points published by industry group MinEx Consulting:
- Gold exploration spend was $12 billion in 2012 and closed at $4 billion in 2019. Less money spent on exploration equals less gold found
- In 2000, 42 major gold discoveries were made and in 2019 only three gold discoveries
- When mining gold, there is a grams/tonne indicator that shows the difficulty level of mining a gram of gold from a ton of ore. This indicator was 5.17 grams/tonne in 1985 and it had dropped to 1.64 grams/tonne in 2017. This massive decrease has shown that all the “easy” gold has already been mined
- In 1990, the average cost of discovering a gold deposit was $53 million. The most recent figure reveals that the number is now closer to $149 million
- The ten years between 2008 and 2018 saw an estimated value of gold of $31 billion but the shocking part of that equation is that it cost $68 billion
The above indicators are clearly showing that it has become increasingly difficult to get hold of new gold supply.
This has a major impact on the price of gold and the its trajectory. If supply keeps steadily declining then we can expect a steady rise in the value of gold.
Looking at the Technical Data
Watching and crunching the numbers is not always an exercise that excites traders and many have agreed that putting in the hours to analyse all the technical data is not always a reliable way to get great results.
There have however been many traders who found their secret to success in analysing the data and they have identified that gold has broken above its 6-year trade trend in 2019.
The indicators are all aligning to be bullish when it comes it come to the gold price.
Analysts are saying that gold is on a bullish trend long-term due to low interest rates, fears around health and the impact of Covid-19, as well as an unstable political climate worldwide.
Predictions drawn from various technical analyses show that gold will approach close to the $1800.00 mark and when it does investors will most likely look to sell to take profits or exit positions to break even.
This data suggests that 2020 is going to be a good year for gold investors as they take profits and it is also ripe for investments. Gold is also due for a pullback in the last two quarters of 2020.
With gold, as well as other assets, you always need to keep your eye on the big picture.
Gold bottomed out in April 2001 at $377.44. Gold has since then been on an upward trend lasting all the way to 2011 where the price was $2065.90 at its peak. We are currently on a continued upward trend as you can see below.
So, this tells you that gold may break through into upper levels, however you only have to look at this graph carefully to realise there are opportunities when the price falls back to its breakout level.
In the graph below you can see that gold broke through its upper boundary here in 2016 as buyers flooded the market.
Then you see after the breakout in 2016, the former resistance trend acts as support in various occasions (marked by the red arrows below).
What this means basically is that buyers are able to purchase gold when it falls back to the key breakout level. While you may not have benefited the first time around you are also given a second chance in the pullback.
Without getting too technical this is what is called support-turned-resistance – a common theme in technical analysis.
Timing is everything and you need to be able to ‘predict’ the lowest price it will go to, to get the best entry price to the gold market. The right broker with the right technical analysis will help you with this strategy.
What the above graphs illustrates for you is that gold spent nearly six years below the $1,574.50 price of 2011 level before its big breakout in June 2019.
Upcoming economic and market factors
I would say that there is serious wakeup call needed for anyone who is of the opinion that life will continue as normal after the effects of the COVID-19 pandemic.
A global shutdown of the world economy has ripple effects that will still be discovered in years to come.
Kristalina Georgieva, managing director of the International Monetary Fund, was interviewed in May 2020 to give comment on the impact that the pandemic has had on the global economy.
She said that the pandemic has “shattered” the global economy and that there is a monumental global effort required to “restart” the global economy.
Even the US, one of the biggest economies in the world, estimate that the turnaround of their economy could optimistically take as long as two years.
Should a stock market crash or major recession come along, then there will be a major impact on the price of gold.
It would appear that gold would be the failsafe for investors to hedge the losses from their other investments taking a dive.
However, experts also agree that just like other assets gold is susceptible to market crises. For example, in 2008 gold ETFs plunged 31% due to the credit crises in the U.S.
However, one thing is for sure this creates a buying opportunity at the bottom and in addition, as reserve banks introduce monetary stimulus packages, gold becomes a great investment.
At the time of writing this article analysts predict that gold is due for a pullback that could coincide with the next wave of Coronavirus-related debt defaults. So, you will need to keep an eye out for this pullback.
It’s clear to see that looking at the market as a whole and considering the large-scale worldwide events that have recently transpired, it become increasingly difficult to identify some stability which you could cling to.
Granted, we can’t categorically state that all hope is lost.
If the time is taken to identify opportunities and formulate strategies that are focused on a longer term, navigating through these tricky waters can be done.
I hope that this article has helped in understanding the gold forecast of this precious yellow metal. According to research in South Africa, there are definitely benefits in its future. While it is not without risk, it may prove to be the stabilising factor that you’re looking for to take the edge off achieving your portfolio objectives.
Frequently Asked Questions
Is Gold traded 24 hours?
Is it better to have cash or gold?
Your cash may be better off in gold that stores wealth as opposed to cash that loses value because of inflation.
Should I buy gold in 2020?
Can I sell my gold to the Bank?
It is perfectly legal to do so.
Can gold make you rich?
You cannot become rich by investing in gold, but it will stop you from being poor.