It's dipped to a six-month low, and investors are nervous. But as long as gold is attractive to both the fear trade and the love trade, hold on tight to your share of the yellow metal. Frank Holmes explains.
14k gold prices
- When It Comes to Gold, Stick to the Facts
- Gold Prices: The Yellow Metal's Still a Great Long-Term Investment
- Why Gold Prices are Ready to Rally
There are a lot of moving parts to the gold story so let's start with the biggest takeaway: Gold prices are facing only a temporary setback.
Longer-term, as the U.S. Federal Reserve and other central banks begin to wind down quantitative easing and, more importantly, begin to ease interest rates back up to more "normal" levels, inflation should begin to kick in and drive gold up to new highs, making the yellow metal a great long-term investment.
First, though, let's tease apart the various factors that currently are driving the price of gold lower.
But gold bulls were pushed aside Thursday after Bernanke, in a speech to Congress, failed to deliver a definitive answer on monetary easing.
Deutsche Bank analysts wrote in a Friday research note via Dow Jones, "The past week has demonstrated how expectations [toward] quantitative easing can have a powerful effect on the gold price."
Now investors need to wait for the June 19-20 FOMC meeting for more clarity on what the Fed could do this year and how metals prices will be affected.
Gold prices have recovered since then, and on Tuesday the yellow metal pushed above the $1,600 an ounce mark. The weekend's news about the Spanish bank bailout and lingering concerns over the Eurozone debt crisis has increased alarm about the global economy, making gold more attractive.
But news from Europe and Fed policies aren't the only factors that can move gold prices. Here's what else is affecting the metals market now.
The Biggest Factors Moving Gold Prices
#1: Central Bankers are Buying GoldFor the first time since 1965, central bankers are purchasing gold.
According to World Gold Council, the central banks have increased their gold collections by 400 metric tons or almost 2,205 pounds in the last 12 months through March 31.
This is a rise from the previous year's 156 tons.
Look for this to continue from the central bank as the council noted it "is now confident that central banks will continue to buy gold and has added official-sector purchases as a new element of gold demand," according to Austin Kiddle in a Sharps Pixley report.
Jeff Christian, founder of New York-based commodities consulting firm CPM Group, told Barron's that central banks "will probably be continuous buyers of small volumes of gold for the foreseeable future," accounting for roughly 10% of the gold supply.
Christian noted that central bankers will avoid buying any quantity that dramatically affects the price of gold. Yet steady buying of 10% of annual supply is certain to help buoy gold prices.