In early 2015, the gold price remained approximately $1150-1250, but as the Chinese economy slowed down, the price finally fell below $1100 in July.
As the Fed was going to rise the interest rate, the bear market itself was predicted by some investors. When the rate rises, the higher yield makes the dollar more attractive, and as a consequence, the gold price, traded in USD, decreases.
However, now we have another influential factor: the slowdown of the Chinese economy, which became more serious than before. So in this article, we contemplate on the two factors that affect the gold price and explain why gold is still a way to avoid the upcoming market crash in a few years.
After the massive impact of the QE, which ended in 2014, the Fed is finally rising the interest rate a few times in late 2015 and 2016. As they claim they’re going to rise the rate slowly, the gold price might fall slowly, too.
However, as long as they continue, it will cause serious effects upon the financial markets. The gold price will fall, and the stocks and bonds will also fall. Eventually, the Fed will need to restart easing at some point in the future, and then gold will rebound and will be a bubble.
Regarding this senario you may refer to the following article, but here we focus on gold itself.
When to buy gold
So, the bottom will be where the Fed is forced to resume easing.
Although we will need to decide the timing watching the bond yields and the extent of the stock market crash, we may roughly assume it will be the third, forth or fifth rate hike in 2016 or 2017.
The price range to buy gold
Regarding the price range, one thing we may refer to is the range from $1000 to $1200, the approximate production cost of gold.
We assume the gold price can go below the range, because the rate hike is powerful enough to destroy many investors’ hopes that the price won’t fall below the range. When such investors dump gold, the price will be finally ready to form its bottom.
Therefore, we may buy gold in the rough range of $800-1000, which is below the range of the production cost, but we also need to think of the risks that the slowdown of the Chinese economy might exert further pressure on the price.
Although the fictional Chinese GDP claims the growth of 7%, the growths of other more reliable indices, such as electricity production, rail freight and iron ore imports, are actually almost negative.
Taking it seriously, the prices of other commodities such as copper and iron ore are also falling. Although China isn’t the only factor that affects the gold price, we should be sufficiently vigilant.
Hedging the China risks
We have two ways to hedge the risks: positions that can profit from the Chinese slow down, or otherwise simply the lower price range to buy gold.
If you have such positions as short selling of copper, iron ore or stocks that are related to them, you’ll be safer to buy gold. If you don’t, however, you shouldn’t be aggressive to buy gold, and then the appropriate range would be perhaps $700-900. This simply means that if you can’t sufficiently hedge the China risks, you can’t buy gold so much.
From 2015, the markets are not as easy as until 2014, since we need to worry that the QE bubble might collapse. Gold is one of a few ways to avoid the market crash, so investors should be ready to buy it when it’s necessary to buy it. We wish you also find the following article useful to learn more about the current situation of the financial markets: