Sometimes it's easy to lose sight of what gold's role is in the financial markets and the global economy more generally. This is because gold is such an unique asset: it is both a commodity and shares characteristics with currencies; it is used as a portfolio hedge in both the short-term and the long-term; it responds to monetary policy as well as geopolitical risks.
You can see why it can be confusing trying to pull apart the multitude of factors that play into the performance of the gold price. However, reviewing the ups and downs of the gold market in 2015 can shed some light on the various components that go into determining bullion prices.
Breaking Up the Trends
The chart below from investment site Seeking Alpha divides the overall annual price movement for gold into eight primary trends that we'll analyze piece by piece below.
1. The early part of the year was dominated by anxiety and uncertainty over the banking crisis in Europe. The European Central Bank (ECB) committed itself to a massive quantitative easing (QE) program in order to stave off deflation, directly resulting in negative interest rates across the continent and the decoupling of the Swiss franc from the euro. This all was supportive of gold, pushing prices just shy of $1,300/oz.
Toward the end of the month and into February, the gold price tumbled lower before bottoming in mid-March, settling around $1,150/oz. The main drivers of this drop were improved demand for U.S. Treasuries—sapping some safe haven appeal for gold into the bond market—and the increasing strength of the U.S. dollar.
The gold price bounced higher in mid-March, trading just above $1,200/oz for much of the summer thanks in large part to a weaker Greenback. This was triggered by dovish meeting minutes from the FOMC gathering in March as well as disappointing economic data in the U.S., predominantly a weak nonfarm payrolls (NFP) report. Undulating fears about Greece exiting the European Union added fuel to the fire.
4. During July, the situation in Greece appeared to improve significantly as the country's leftist government reached a bailout agreement in principal with its creditors in Europe. This removed most immediate safe haven support for gold. The drop was exacerbated by the People's Bank of China publicly understating its gold reserves in the first such announcement in more than 5 years, while optimism about the U.S. economy drove gold down below $1,100/oz.
Gold rallied anew in August thanks to the epic collapse of the Chinese stock market. In a matter of weeks, the Shanghai Composite index, the country's flagship stock index, lost a staggering 40% of its value. This spurred a modest amount of safe haven flight into gold.
After the markets adjusted to the "new normal" of a significantly weakened outlook for the slowing Chinese economy (and its volatile equities market), gold briefly resumed its downward trend in early September.
For most of September and the entirety of October, gold rallied on the notion that the Federal Reserve was hesitant to raise interest rates due to the shaky state of the American economy and the negative headwinds from the global economy. (Most experts had expected the Fed to make its first interest rate hike in a decade in September, and the FOMC balked.) This sent real interest rates lower, hurting the dollar and boosting gold back to $1,185/oz.
8. Finally, a hawkish outlook from the October FOMC meeting (the last gathering by the committee before its eventual decision to increase interest rates in December) was a boon for the USD and therefore real interest rates. Both the dollar and effective interest rates surged in the wake of the hawkish October FOMC meeting minutes, sending gold in the opposite direction for the rest of the year as it settled back to its year-end (and yearly low) price of $1,060/oz.
Although this is not always the case, gold's performance in 2015 only briefly took geopolitical risks into account—when Greece looked on the verge of default. However, even this event can be seen as less geopolitical and more closely tied to financial and economic turbulence (like the banking crisis across Europe).
Instead, the main factors influencing the gold price were the strength of the U.S. dollar, with which gold is inversely correlated, and to eventual rise in real interest rates. Rising interest rates dampen gold's appeal because of the opportunity cost of holding the metal. (Gold doesn't provide a yield commensurate to interest rates like bonds do.)
Because the interest rate outlook is more muddled in 2016 and the geopolitical tensions in the Middle East have mounted, the gold price is responding to different fundamental drivers thus far in the year. Yet, if the analysis above reveals anything, it's that the circumstances behind gold's performance is rarely linear; it fluctuates with the dynamics of the global economy and financial system.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.