Will Gold go to 5000 Dollars?
“A market is the sum knowledge of all of its participants.”
At the time of writing, the price of gold is USD $1781 per ounce. Many factors weigh on the price of gold at any given moment. Some factors affecting gold will be geopolitical, some fundamental and technical as well. Market sentiment, sometimes referred to as trading psychology, plays a significant role in influencing the price. Each one of these constituents also has a weight.
Many market participants have very passionate views about gold and its pricing. Polarized opinions concerning gold are more familiar than perhaps any other commodity, with people dividing themselves into camps. Gold Bugs feel that gold is chronically underpriced. They are eternally bullish and optimistic about higher prices. On the opposite end, some people think that gold investment is a losing proposition. It is physical and heavy, needs to be stored securely, transporting it requires specialized logistics, and it does not pay dividends: All these aspects cost money, affecting the return potential. Of course, some hedge their bets, not wanting to risk it all or lose out!
This article discusses what would be needed to lift gold from its current valuation to the lofty $5000 per ounce.
Geopolitics plays a significant role in the gold price as central banks have extensive holdings of physical gold. Sometimes these banks are net purchasers of gold bullion, and sometimes they are net sellers. Most central banks have been purchasing gold since the 2008 financial crisis. However, in the past couple of years, circumstances have changed for some. Turkey, in crisis, has been selling off its gold reserves for dollars, as its currency has plummeted in value.
China and Russia have been on a buying spree in the past decade to build up their national gold holdings. Removing gold from the open market creates a supply shortage. Less gold in the market combined with heightened demand forces up the price for industrial and retail users. At the same time, the value of the central bank holdings also increases.
Of all the fundamental factors affecting the price of gold, the most pertinent is the amount of gold in the world: It has always been an element with limited supply.
Approximately 2,500 to 3,000 tonnes of gold are mined each year, with about 190,000 tonnes mined to date. In the past two decades, discoveries of gold have become less frequent, with finds of large veins even more of a rarity. Current models predict that mining gold will no longer be economically viable sometime between 2050 and 2075. Economic non-viability doesn’t mean there will be no gold left to mine; rather, it implies the cost of mining will be higher than the value of the metal.
Gold is one of the most recycled materials in history. Unlike other commodities such as oil, it can be used many times over. However, there is one big problem in today’s society: A lot of gold is being returned to the earth. This is because so many electronic devices have a small amount of gold used in their fabrication as gold is a very efficient conductor of electricity. When these devices break, they usually end up in a landfill. Factor in the lifespan redundancy built into current design practices, and it begins to look like an ever-increasing source for gold won’t likely be recovered.
If the global demand for gold continues to grow, while supply does not, the basic theory of supply and demand dictates that the price of gold will appreciate significantly.
Growing populations across Asia that have access to more disposable wealth than previous generations, in tandem with a cultural disposition to owning not just jewelry but also bullion, should indicate that future demand will only continue to increase. This adds further to the argument for a significant and sustained rise in the price of gold.
The price of gold is strongly influenced by interest rate markets, specifically U.S treasury bonds.
Considering that interest rates remain near zero in many G7 countries, treasuries are an underperforming investment and have been for some time. Along with vast stimulus packages – the printing of money which the issuing central banks later reabsorb – gold tends to rally in markets such as this because the gold supply is much harder to increase than the money supply. As money is printed, it becomes devalued relative to gold.
Gold is susceptible to interest rate changes that come from the U.S Federal Reserve (FED). For instance, at the FED meeting in June 2021, they announced they were ready to begin looking at increasing interest rates in the not-too-distant future. Gold was negatively impacted by this prospect, losing about USD 50 an ounce in that one session alone. In the subsequent two sessions, it also lost another $50 an ounce. The losses only ended when the FED retracted its intention to start hiking rates.
Interest rate fluctuations are one of the main factors that could negatively weigh on the prospect of gold achieving a price of $5000 per ounce in the foreseeable future. Anyone who remembers the days of the late 1970s and early 1980s when rates were as high as 20% can understand why this would hinder gold’s ability to appreciate.
Market participants with less than 12-13 years of experience who have never faced an environment of rising interest rates are unversed in how these markets move. Markets don’t move in just one direction. The age of free money will come to an end one day. Gold will be the first market to suffer when that pendulum starts to swing the other way.
Another meaningful relationship is the gold-silver ratio (GSR). GSR indicates how many ounces of silver are required to buy one ounce of gold. Today, an ounce of gold is worth 68.22 ounces of silver. If the GSR remains relatively stable, for gold to approach $5000/oz, silver would also need to see a corresponding rise in price. Such a rise would lift silver to the $73.30 per ounce area and create considerable inflationary pressures on the economy, given silver’s vast and expanding industrial usage.
Market sentiment refers to the collective attitude that market participants feel about anticipated price movements in a given market. This attitude is a combination of many different factors. They include fundamental and technical indicators, historical price activity, upcoming economic reports, seasonal influences, and national/global events.
Sentiment can be a fickle thing prone more to herd psychology than to fundamental or technical information. Often one of the crucial yet overlooked factors is how markets are motivated by fear and greed: Fear of not being in a rising market and fear of being in a falling one. Greed is essentially the flip side of this coin: wanting to buy at the very bottom and sell at the very top.
Herd mentality plays more of a factor in markets that are falling quickly rather than rising markets, as everyone runs to the exit at the same panicked moment. Markets like these often make exaggerated moves in one direction before retreating in the opposite direction. This same behaviour can be seen in nature when elephants stampede. They will go in one direction trampling everything in their path before turning 180 degrees and returning from the way they just came. Trading plans often go askew when you start to trade using your heart as opposed to methodology. That is why it pays to be a disciplined trader. Plan your trade and trade your plan.
Current market sentiment sees many market analysts anticipate gold to return to the $2000 an ounce level by the end of 2021. A little more than $200 higher from current levels but still a long way from $5000. Bullish attitudes are prevailing at the moment, but it probably won’t be a straight line upwards.
Will gold go to $5000 an ounce? The ultimate answer is an unequivocal yes. The important question is, when will it hit $5000? That question is a lot more challenging to answer. Of course, anybody holding gold wants to see that event sooner than later and especially in their lifetime. Markets ebb and flow like the tides, and sometimes coastlines change because of tidal action. For gold to get to $5000 anytime in the next decade, there will have to be a perfect confluence of all the right factors lining up like a row of ducks. The odds of this happening are remote but never say never.
As gold climbs above certain levels, such as $2000 and $2500, it will attract more speculative and industrial users, not wanting to purchase at higher prices in the future.
If you’re prepared to hold it for the long run, and considering gold’s current pricing, it’s a relatively good area to be establishing a long position. The question you need to ask yourself, as in any investment opportunity: what do you expect out of it and over what time horizon?
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