The Impact of Fluctuation of Gold Prices on Financial Crises

استشاري وظيفة

The Evolution of the price of gold 10 years ago comprises peaks; this is due to the influence of several factors that relate to a movement in the gold price. It is a given upward trend that has been caused by the implementation of monetary policy in order to ease the amount obtained by the various bodies such as the US Federal Reserve and the European Central Bank, other than -There is also playing this role as the Bank of Japan and the Central Bank of England. In normal zone, by a credit that the monetary system is used. The reason why to do so and that at all costs avoid deflation of the money you this happened during the crisis of 1929. This is why central banks keep an eye on the money supply.

In the financial world, there is a reversal which affects the price of gold in recent years. This fact is that many economic actors raise the question on the performance of gold which is however seen as a safe haven. Despite this caution, gold still remains on a value and it is following an analysis pushed finance experts. For clarification, we recall that this is not the first time that a drop of gold is observed and despite that, it has always been very popular in 10 years.

To determine the value of gold 18K, it is always desirable to have a look at the trend of gold prices in the world market. This value will of course be displayed in grams or Euro. The price in grams of 18k is determined by a series of small calculation, certain variable is used. Today, gold is its good climb and this causes a sharp view of investors in the financial field. The course of the 18K gold is equal to that of gold prices; they all undergo the same mounted. In the market, gold is seen as a safe haven and to this end; it is medium and long term this trend exist.

Gold was the first metal known to primitive man, this is the ultimate currency for thousands of years. Nothing has changed. It still protects us and always risks of inflation and irrational fluctuations of national currencies. With an ounce of gold you can buy today almost the same amount of basic goods at the time of the Roman Empire or of the Egyptian civilization.

The price of gold has fallen yet well in recent weeks. But in a bull market for twelve years, it is normal and even healthy that the price of gold goes through downturns, shorter or longer.

Some reasons: rising dollar, falling oil and big players who have decided to leave markets volatile considered to reduce their risk and to pocket their gains on a course that had doubled in less than three years. Gold is one of the raw materials processed. The exchanges represent more than 4000 billion per year. Normal in this case it is very enclosed and submitted to context. Context where everything is possible in the short term: strong temporary increase to counter the major stock market declines, stagnation or slow down if the dollar continues to appreciate and oil to fall.

In the long term only option seems credible: the value of gold will only grow. Here is a list of very good reasons:

  • More than all the other indices, the price of gold has largely evolved between 2000 and 2012. It has more than quadrupled over this period without having reached half the levels of 1980 (when adjusted for inflation ).
  • The supply of mines is well below final demand. Companies operating gold deposits have closed the most difficult to exploit mines to improve their profitability. World production of gold stagnates. Since it takes between 7 and 10 years to exploit new deposits during this period demand will be stronger than supply. The year from which production began to decline, has already been achieved: it was in 2001 with just over 2500 tonnes mined. The amount of gold produced to date is 155,000 tonnes, a large cube of 20 meter square. There are approximately 100,000 tons of gold in the ground, including a maximum half is operable.

Small reminders: The fifty mines which will come in service by 2015 will only produce 600 tonnes and, in parallel, many deposits close. Finally, we must expect a growth of 3 to 4% of production where the demand is much higher and only compensated by central bank sales (which also reduced). According to Barrick Gold, one of the largest gold producers in the world, rising production costs is one of the main reasons that the cost of gold know an imminent rise.

In 2012, many social conflicts have shaken the gold mines of South Africa. Amid riots that resulted in the deaths of dozens of miners, mining was a conflict of unprecedented violence. And elsewhere on the African continent also crossed by a protest wind this year. These conflicts have highlighted the operating conditions increasingly difficult and working conditions of miners.

More in the article "Strike in South Africa: Gold Blood".

  • Gold still rising when real rates are low. Now we are in a low interest rate period or very low (USA in particular). Gold's performance in periods of stagflation were many times demonstrated. The yellow metal behaves very well when real interest rates are zero or negative (gold provides no yield).

In the US, interest rates are even historically low, and lower for thirty years.

  • Since 2004, central banks concluded the Washington agreement to regulate and limit their sales of gold reserves. A massive influx of gold from central banks is not to be expected. On the contrary, banks have even become net buyers of gold, in a move driven since 2009. In 2012, central banks have also added more gold to their reserves than at any time since the Second World War. They are mechanically up demand and therefore, the value of gold.
  • The gold trade is liberalized in China but imports still highly regulated, the growth potential is enormous as demand continues to grow. Sixth countries holder of gold, China aims to move second in the world, behind the United States. The great power is already a major player in gold: it is the largest producer. The aim of the great power is to acquire a stock of 8000 tons of gold. What rival the US reserves.

For China, the aim is also to be able afford to lean back its currency with gold. This also requires special purchases, driven by the government to acquire gold.

  • The gold becomes a safe haven and financial gold purchases explode. Offline performance shares or bonds, gold appears as a portfolio diversification tool for pension funds and professional investors. Gold has the supreme advantage of it can not be duplicated at the request and not to depend on the sovereignty of a State. The scarcity and security features are the bases of gold. It is proven in difficult times (such as during the Argentine crisis, gold owners have not suffered from the huge devaluation of the local currency). Any geopolitical problem is favorable to gold, as well as any financial crisis (there was still evidence in the stock market crisis of this year)
  • Recent crises the United States have raised awareness to investors that dynamic money market investments were risky. This triggered a gold purchase reflex. Who is definitely not over, because the United States still face the threat of budgetary wall, the "fiscal cliff." If an automatic snaps austerity cure, the country will face austerity measures.
  • Since 2002, the dollar continues to lose value against most currencies. Gold is seen as "anti-dollar" par excellence. Excessive money creation dollar from EDF depreciates the value of the currency by generating an increase in the price level in the US and the world. The purchasing power of a dollar therefore continues to erode. As for gold, given its rarity, it maintains its value. The current level of the dollar is not new. The euro / dollar (reconstructed from the former national currencies of the current euro zone) was $ 1.70 per euro on Jan. 7, 1980.

To cope with their problems of unemployment, debt and budget, "FED", the US central bank, decided in December to create more money. A decision that has some influence on the price of gold to rise.

  • The gold is priced in dollars, a fall of the latter leads to a mechanical increase in the price of the precious metal. To counter the decline in US growth, the Fed must maintain low interest rates and therefore the dollar will remain weak.
  • The rise of gold is also linked to the rise in inflation, which is associated with the surge in oil prices and raw materials or agricultural. In the long term, oil prices may not fall, global inflation is expected to remain in the high range for many years.

In conclusion, if we retain only three reasons to buy: gold is a safe haven recognized and accepted around the world, the demand of emerging countries is strong and the needs on the medium / long term are higher than the offer.

In short, you'll understand that we can only advise you to invest in gold. Now the question is how. Explanations in this article "how to buy gold."

At the time of Pharaoh Tutmosis III, it was the equivalent of 2 ounces (about 62g) to buy a beef. Today it would take 2.5 oz. Inflation is relatively low in 4000 years.

The event of the moment is the drop in the price of gold at € 915.2 and $ 1142 that day, weighed down by the rising dollar, an unprecedented decline since a lower level in April 2010. This news does not change anything in this article written in September 2008 ... Neither global economic fundamentals or the fundamental gold remains excellent by THE safe haven.

First observation: the economic fundamentals are still poor: Europe is still struggling against deflationary forces with growth at zero, rates that increase dangerously in Russia and Brazil, the slowdown in the growing China. Not to mention the ultra accommodative monetary policy of the United States, Japan, which prints paper money with blows of Quantitative Easings, followed by many other countries sign the death warrant of the international monetary system.

Behind the collapse of the price of gold is hiding the reality that central banks and governments will do everything in their power to save their paper money. Countries can not get out of the system without causing turbulence in financial markets. And while the gold price plummets, central banks continue to buy gold sold off in price.

The fundamentals do not change: the offer of mines remains below demand, the rates are still low, Asian demand is still very strong, it even exploded since the writing of this article, despite a "recovery" US economic The stock market is always on the verge of the stock market crash, and European banks are on the verge of bankruptcy.

The system of the gold standard money management allows a paper currency with confidence because the central bank of the country retains sufficient gold reserves to exchange the number of Notes outstanding against their value equivalent gold.

This system was designed in the nineteenth century to create an automatic adjustment mechanism to surpluses and trade deficits between countries. The principle is that a country that exports more than it imports (and thus liberates trade surplus with another country) accumulates a surplus of foreign currency. This foreign currency surplus can be stored for later use or shared with the central bank in the foreign country against gold. This transaction increased the gold reserves of the country in a situation of trade surplus, which raises the value of its currency and domestic prices, making its products less competitive globally. While decreasing its exports and consumption of foreign goods is accelerating, which has the effect of restoring the trade balance?

Central banks can also exercise their power on the trade balance by raising interest rates, for example, to counter a trade deficit. This measure broke imports, attracted foreign capital and, consequently, eliminated the need to ship gold to trade partners.

England was the first country to adopt the system of the gold standard in the early nineteenth century to anchor the value of its currency and regulate the trade balance of its economy.

During the second half of the nineteenth century, other European countries have done the same. In 1879, the United States adopted in turn the principle of the gold standard, allowing the exchange of greenbacks for their gold equivalent.

Thus, during the period from 1880 to 1914, the parity of the US dollar was fixed at $ 20.67 an ounce US1, the British pound to 4.24 GBP1 ounces, to establish an exchange rate of 4 87 USD / GBP.

This system was effective until the outbreak of the First World War that prompted many European countries to suspend the convertibility of their currencies into gold to avoid ship in the enemy countries. The exchange rate then began to fluctuate significantly, at the option of strong expansionary monetary and fiscal policies. The US dollar, maintaining its parity with gold, has greatly appreciated in relation to the European currencies floating in wartime.

After the war, European countries, were concerned about the growing attraction of the dollar (or convertible) and US assets, have expressed their intention to return the system to the gold standard.

After an attempt that proved unsuccessful, it was abandoned by much of Europe in the early 30s.

In 1934, the US Congress decided to increase the official gold price from $ 20.67 an ounce to 35 per ounce, and devaluing the currency by more than 65% in order to restore the competitiveness of the economy American.

In 1971, the United States abandoned the system of the gold standard, ending at the same time the official role of gold in the international monetary system.

Floating Currencies Period

Following a more expansionary monetary policy, coupled with a rise in geopolitical concern caused by the invasion of Afghanistan by the Soviet Union and by the Islamic revolution in Iran, gold regained its safe haven role and prices surged to a record $ 850 per ounce in 1980.

Paul Volcker in 1979, and Alan Greenspan, in 1987, came on the scene, as the US Federal Re- serve presidents, with the mandate to curb inflationary pressures and restore expectations to healthier levels for sustainability of economic cycles.

For much of the presidency of Alan Greenspan, from 1987 to 2006, the gold price has remained relatively stable and in a narrow range, between 350 USD and 400 USD per ounce.

Moreover, during a press conference in 1987, Mr. Greenspan left imply that in order to operate effectively; the US economy required slight 2% inflation and, therefore, an annual continuing depreciation 2% of the gold.

Between 1997 and 2000, a skid of monetary policy has caused a sense of irrational exuberance in financial markets, because of the US productivity miracle, the bug of 2000 and of the technology bubble. The strong demand for US dollars that resulted favored a marked appreciation in the exchange rate compared to most currencies, including the standard of value represented by gold. In other words, the price of gold fell rapidly to 256 USD per ounce. The strong appreciation of the dollar resulted in the vortex of financial deflation, large US dollar borrowers as Asian countries, Russia, Brazil and the hedge fund Long Term Capital Management (LTCM). They lived successively stronger crises harmful or even ruinous.

Inevitably, this too strong dollar caused a marked slowdown in the US economy. Moreover, with the bursting of the technology bubble, the terrorist attacks and the war in Iraq, the economy was threatening to take a long time before recovering some strength, hence the emergence of deflation fears, c ‘is to say a general downward trend of consumer prices.

Faced with this threat, the Fed (Federal Reserve) had to act vigorously. We remember that between 2000 and 2001, short-term US interest rates fell from 6% to less than 1%. In the context of an inflation rate of around 1.5%, a 1% rate was particularly low, as it represented negative real interest rates. In other words, the Fed offered free money to those who were willing to borrow.

Indeed, under such conditions, the amount of money in circulation soared, weakening at the same time the value of the US dollar, and pushing at the end of 2003 the price of gold to its ceiling of the Greenspan era or 400 per ounce, where it is essentially maintained until the end of 2005. As a result of this monetary policy more expansionary, the economy rebounded and experienced strong growth.

That is why, since 2004, the Fed is working to gradually restore the level of US interest rates. To date, it has already increases from 1% to 5.25%. With higher interest rates, foreign capital has shown again its appeal to US assets, while the dollar has gradually appreciated during this period of monetary normalization.

But since the appointment of Ben Bernanke to chair the Fed in October 2005 the price of gold jumped from 470 per ounce to over 660 USD per ounce.

It is the new Fed chairman to interpret what the markets welcome message. Is it a lack of confidence in the ability of the new leadership of the Fed to reduce inflationary pressures? Or is it a phenomenon peculiar to gold that cannot last?

Rising gold prices raised fears that markets anticipate a skid of controlling inflation by the Fed. However, no other variable that may be sensitive to the same development seems to be affected. For example: although the US dollar depreciates in comparison with gold, it is relatively stable against all foreign currencies. Also, real return bond yields continued to move very slightly, which is a possible indication that deflationary in- expectations are well anchored at current levels.

However, the lack of validation of monetary skid fears could also be explained by a phenomenon of excess savings globally, characteristic of today’s markets: the low level of real interest rates and the strong dollar might only be a reflection of this excess capital to invest and therefore would simmer slowly but surely, upcoming inflationary pressures. In this scenario, the Fed should resolutely pursue its interest rate hikes to tame these pressures.

The rapid rise in the price of gold could also be the result of a rather transient phenomenon inherent to:

  • increasing personal and commercial demand for gold from India, the Middle East, China and the rest of Asia;
  • Increasing geopolitical uncertainty (Iraq war stance in Iran, etc.);
  • The rapid integration of China into the global economy, specifically the factors attracting investors to the precious metal as a safe haven. In this case, the Fed should ignore the price of gold should fall eventually.

Financial markets have therefore challenged the new President of the US Federal Reserve. Did he report to? Is it more of a distraction?

In conclusion, the main factors affect the price Fluctuations of Gold are inflation, Interest rates, The stock markets, Geopolitics, The US dollar, Oil prices, The Asian demand, and the wars taking place every now and then all over the world.