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Gold Price Dancing – Indicator for Uncertainties?

maxxyustas / envato elements

The fact that the SJC gold price has always remained superior to the world equivalent price, as well as often increased faster and decreased more slowly, on the one hand, reflects the imbalance of supply and demand due to policies restricting gold import.

Another factor that has also strongly influenced the recent increase of the international gold market is the forecast that the demand for hoarding of countries may soon increase again.

Dance of gold

Rising 15% in just one month from early February to early March, the world gold market has become one of the best profitable investment channels amid the continuous correction of risky assets such as stocks. On March 7, 2022, the price of this precious metal once approached the old record of around US$2,070/ounce achieved in August 2020, before correcting back to around US$1,970/ounce. ounces as of the beginning of this week.

The domestic gold price increased, even more, when it climbed from around 62 million dong/tael to 74 million dong/tael, thereby expanding the difference with the world gold price to 20 million dong/tael. on March 8, the highest ever). However, like every price push before, the market increased rapidly and then dropped in shock when only two days later the gold price dropped to around 67 million dong/tael, or 7 million/tael, equivalent to nearly 10%.

In addition to the fear that the hostilities in Ukraine have led to increasing tensions between Russia and the West – led by the US and the European Union (EU), with sanctions and retaliation against each other across the world. On the economic, diplomatic, and political fronts, the trend of soaring inflation globally is also driving money into gold as a safe option.

The US consumer price index (CPI) in February 2022 continued to increase, reaching 7.9%, the strongest increase since January 1982 when oil, food, and housing prices all increased; following the 7.5% increase in January. In Europe, February CPI also increased to a record high of 5.8% due to a high gas and oil prices. Vietnam also cannot avoid the general trend, when the CPI in February increased by 1% compared to the previous month due to the influence of gasoline prices increasing according to world fuel prices.
Another factor that has also strongly influenced the recent increase of the international gold market is the forecast that the demand for hoarding of countries may soon increase again. Specifically, in the context of the war affecting the economy, Russian people increased the conversion of rubles to gold, the Russian Government at the end of February announced that it would resume buying gold after two years of maintaining flat reserves.

In addition, with recent Western sanctions freezing about $300 billion of Russia’s $640 billion in foreign exchange reserves, lessons from Russia will make many other countries increasingly vulnerable. seeks to increase holdings of gold as a safe-haven asset under any circumstances, as well as to diversify foreign exchange reserves, limiting the impact if unfortunately sanctioned. In fact, since 2014, Russia has also been gradually reducing its holdings of US dollars, accumulating gold and non-US currencies instead, including the euro and yuan.

According to statistics from the World Gold Council, central banks globally in 2021 have increased their reserves of nearly 463 tons of gold, an increase of 80% compared to 2020. In addition to buying power from the government, this organization said. Purchasing power from the private sector also increased sharply. Specifically, in 2021, Indians bought nearly double the amount of gold jewelry compared to 2020, to 611 tons; In mainland China, gold consumption also increased 63% last year to 675 tons.
Fear of instability

Returning to the domestic gold market, the fact that the SJC gold price always remains superior to the world price, as well as usually increases faster and decreases more slowly, reflects the imbalance of supply and demand caused by the domestic market, the policy of restricting gold import.

The high anchorage of domestic prices compared to world prices will also put pressure on the US dollar/dong exchange rate, as gold traders will collect US dollars in the country to smuggle gold to meet increased demand. up in the water.

Obviously, when the domestic gold price increased “to start” in a short time, pushing the difference compared to the world price to be converted to 20 million VND/tael, it was difficult for retail investors to dare to buy, even many people are still trying to sell. Therefore, it is not uncommon for many gold dealers to quickly reduce the purchase price after a shocking increase in just a short time.

In fact, with the profitability of the gold market in recent years, it is no longer attractive compared to many other investment channels, the risk is high when the price difference is large, from the difference compared to the converted world price to the price difference. The price difference between the buying and selling prices, so people are not very interested in this investment channel. The trickling buying force mainly comes from people who have a preference for long-term asset accumulation and accept to bury capital.

However, if the market continues to dance like that, this is also considered a worrying indicator for the instability of the economy in the coming period.

It should be noted that basically, when the monetary policy starts to tighten, with interest rates going up again, people tend to shift their money to better-yielding assets, causing gold to depreciate. However, this principle does not seem to have happened in the present context. Specifically, despite the plan to raise interest rates by the US Federal Reserve (Fed) this year, as well as by central banks around the world, the gold price is still establishing a strong uptrend from the beginning of the year to the end of the year. now on.

According to longforecast.com’s forecast, the world gold price may soon conquer the US$2,300/ounce mark this year, and in the long-term may surpass the US$3,000/ounce mark in the next three years, before the prospect of Inflation stagnation could spread across the globe. Notably, this organization also forecasts that the world oil price may soon surpass the 200 USD/barrel mark at the beginning of next year, leading to the galloping inflation becoming more serious, causing the inflationary spiral to climb. ladder, money depreciating, and then pushing the gold price up will continue.

In the past, gold always shined the most in crises. The price of precious metals skyrocketed amid the stagflation of the 1970s, increasing more than sevenfold during that decade, reaching as high as $850 an ounce in early 1980. Gold was followed by the price of gold. rebounded after the 2008 global financial crisis, peaking at $1,900 an ounce in 2011, but then slid for most of the next decade, before rebounding from 2018 and breakout in the first half of 2020 because of the Covid-19 pandemic.

With the prospect of prices continuing to go up in the context of geopolitical tensions and high inflation expectations, causing domestic prices to dance continuously and keep the gap high compared to world prices converted, it is difficult to avoid the market. The right situation stimulates a part of professional investors and a part of the population will really return to speculating and surfing in this market.

At that time, the demand for holding gold will really increase again, cash flow from other investment channels, even safe channels such as bank deposits will also be sucked in here, affecting the liquidity of the system. system and then put pressure on interest rates. Yellowing may return with greater intensity.
In addition, with an economy that loves gold and has the mentality of using gold to determine prices in many areas of life like Vietnam, inflation is expected to increase further when the escalation of gold prices does not stop. The high anchorage of domestic prices compared to world prices will also put pressure on the US dollar/dong exchange rate, as gold traders will collect US dollars in the country to smuggle gold to meet increased demand. up in the water. The devaluation of the dong and expected inflation will put more pressure on interest rates.

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