The gold price is determined by the worldwide gold market such as London and New York
The gold price changes every day. There are 2 markets available, which is “futures market” that are mainly for investment purpose, and “spot market” which is use to trade physical gold.
The global gold trading is active in 4 major cities: London, New York, Zurich and Hong Kong, they are known as the 4 Major Markets. Among these 4, London and New York have exceptionally big influence to the gold market.
London market is the biggest market for physical gold trading, while New York market is very active in the trading of gold futures. Affected greatly by London and New York, the gold price changes on a daily basis. Although Tokyo is not included in the 4 major markets, it is known as a representative market for gold.
How to check the gold price
The way to check the gold price for futures market and spot market are different. In the case of futures market, the trading price will be shown by Tokyo Commodity Exchange. While for the spot market, companies such as Tanaka Kikinzoku (precious metal) Group will announce the price. The gold price does not determine by only the physical gold because it is also imported, therefore it is affected by the oversea trading price and currency exchange rate as well. br>
Not every company is allowed to publish the gold price. Only very limited companies are allowed to trade gold because the purity of gold and prevention of fabrication are utmost important in the trading of gold. In Japan, companies such as Tanaka Precious Metal Industry and Mitsubishi Materials are allowed to handle gold, they are also companies certified by London Bullion Market Association (LBMA). LBMA is a trade association that sets the standards for gold and other precious metals circulating in the precious metals market in London, and are registered as an authorized association to melt gold and other metals. Bullion of certified companies will be able to circulate in the global markets.
However, it is also true that the gold price varies slightly from company to company, with each company determining the price at which gold is traded.
Commodities that can affect by the gold price
The gold market price can affect the gold products such as accessories and jewelry, and the raw materials of computer. In other words, if the gold market price rise, the price of gold products and material cost of products that use gold will rise.
Examples of product that will affected by the changes of gold price include rings, bracelets, earrings, necklaces, watches and fountain pen. In the other hand, products that use gold as their raw material are also affected, for example, electronic substrate of computers and smartphone, aircraft designed for electronic warfare and more. Furthermore, bullion, gold bullion coins and commemorative gold coins that are made of pure gold with 99.99% purity are also included.
The characteristics of gold price chart
Below we will introduce about how the chart of the gold market fluctuates and its characteristics.
The highest record of gold price is RM 318.76 per gram
The highest record of gold price in Malaysia was RM 318.76 in August 7, 2020. The pandemic of coronavirus was raging around the world, causing the world economic to fall into stagnate. The reason behind the record price was due to the uncertainty towards the economy, which lead to a great flow into the gold, the condition of U.S. economy was also part of the reason.
Because gold and dollar are closely related, therefore, the gold price will soar when the U.S. economy is unstable.
In February of 1979, the Pahlavi dynasty backed by U.S. was overthrown during the Iranian Revolution. In November, a hostage crisis occurred at the U.S. embassy in Iran, both countries fall into a hostile relation. Later, a surprise attack by Iraq led to engagement with Iran and the war began in earnest. During the chaotic situation in the Middle East, the gold price reached RM 232.15 yen in 1980.
The uncertainty towards the economy and influence of U.S. economy, causing the high demand of gold, resulting in the new high of gold price.
The lowest record of gold price was RM 28.91 per gram
The lowest record gold price in Malaysia was RM 28.91 in 1998. The reason was due to the significant reduction in crude oil prices implemented by the Organization of Petroleum Exporting Countries (OPEC) in 1983. The gold price plunged together with the oil price because the prices of these 2 commodities generally move in the same direction.
In 1985, the Plaza Accord, which can be deemed as the beginning of the Japan’s bubble economy, led to the depreciation of dollar through intervention by central bank to correct the high currency rate of dollar. Reacting to the rise of yen due to the drop of dollar, the bank of Japan lowers their interest rate, which cause the financial institutions and companies to invest more in properties and stocks. The flowing of fund into properties and stocks from gold resulting in further plunging of gold price.
However, the bubble burst in 1991, due to the implementation of Total Real Estate Loan Limitation by Ministry of Finance Banking Bureau (at that time) and monetary tightening by bank of Japan. The economy has been a slump since the bubble burst. In 1997, the Yamaichi Securities, which was considered as one of 4 major securities companies at that time, decided to close down their business. On top of that, the hike of goods and service tax to 5% in April added more weight to the economy.
The burst of bubble and closed down of Yamaichi Securities brought significant impact to the gold price, and made its lowest record in 1998.
Relationship between gold and platinum
Speaking of gold and platinum, the platinum price has remained higher than gold price for some period of time. However, the gold price has took over the place of platinum currently. Gold and platinum each have their own variables. For example, gold can be a holding by individual and central bank, and it is also needed as materials for many products. Whereas for platinum, other than platinum-made product, more than half of the demand comes from industrial use.
The industrial use mainly and dollar
The global economy is dependent on dollar as the world’s reserve currency. When the dollar decline, the target of investment will switch to other currency or equities, including gold. Because gold is tied with dollar, so generally the gold will rise when dollar decline, and vice versa
Therefore, when U.S. economic indicators are strong, gold will be sold and people will buy dollar, and when the indicators are weak, people will turn to gold instead of dollar.
The factors that affect gold price
Since the gold price is affected by various circumstances, the following is an introduction to the factors that can contribute to its fluctuation.
Balance of demand and supply
The gold is affected by balance of buyer and seller in the market. In other words, if the demand rise and the supply couldn’t keep up with the change, the gold price will rise. Conversely, if there is an oversupply, the gold price will drop.
The total amount of gold that has been mined throughout human history is estimated to be 200,000 tons. The production of gold mine since 2016 has been maintained on around 3500 tons yearly. Although the production is stable, but the gold reserve is limited, so the supply of gold is expected to decline in the future. On top of that, the demand hasn’t seen any decline, so if the demand continues, the possibility of gold running out will be more prominent. Without the discovery of new gold mine or breakthrough in mining technology, market prices and current products will be affected in many ways.
However, if the gold used for gold products or raw materials can be reused, even if it is difficult to meet the demand, it can still act as supplement for the annual supply.
International Situation
When the international situation become unstable, gold price tends to rise due to uncertainty towards future, and when the situation starts to stabilize, the gold price may fall accordingly.
In September 11, 2001, the gold price soared after the terror attack in U.S. by the Islam extremist terrorist organization Al-Qaeda. At the time, the destruction of building of World Trade Center and surrounding infrastructure dealt a blow to the economy of New York city, causing the temporary closedown of Wall Street, and heavily impacted the global market. The uncertainty towards U.S. economy leads to the crash in stock market and dollar, resulting in the rise of gold.
Right after the 911 incident, the gold price in Malaysia also took flight in the first time since the lowest recorded price in 1998. When there is uncertainty towards the future of global situation, people tend to rush to gold, causing the gold price to rise.
Because by switching into gold, people protect the value of their asset. Gold is a physical asset, therefore even if the price become cheaper, the value of gold itself wouldn’t disappear. However, unlike gold, equities like currency and stocks are at risk of becoming worthless if the corresponding country or companies goes bankrupt.
In short, when the global situation become unstable, the gold price rise. But when the situation starts to stabilize, money will flow back to currency and stocks from gold, and the gold price will decline.
From the 911 attack in 2001 to the Iranian Revolution, the Soviet–Afghan War in 1979 and the Falklands War in 1982, whenever there is destabilization around the world, people will rush to “safe haven” such as gold.
The Global Financial Unease
The insecurity in global financial situation will also cause the gold price to increase.
Towards the end of 2007, the problem of subprime mortgage started to became apparent. Subprime loan is a type of mortgage loan in U.S. for the subprime borrowers who want to buy house. In the other hand, subprime borrowers are those borrowers who have lower credit ratings compared to the prime borrowers.
It started to became a problem when government-backed home mortgage companies such as Fannie Mae and Freddie Mac bought the subprime mortgage in large bulk from the financial institutions, packaged them into securities and sold them to the public market as mortgage-backed securities (MBS).
The MBS was sold on the assumption that the house price will continue to rise, the U.S. house price starts to bubble since 2005, it reaches its peak in 2006. As the house price starts to fall gradually, people became unable to pay their mortgage, creating a situation where the amount of loan is higher than the value of the house, causing increase in defaults on mortgage and seizures of properties. The chain reaction of this occurrence lead to a global economy crisis.
During the subprime mortgage crisis, the gold price rises.
Later, the “once in century” global financial crisis came. As the housing bubble in U.S. burst, the financial institutions that hold the MBS were heavily impacted by the subprime mortgage problem. Government-backed home mortgage companies like Fanny Mae and Freddie Mac who bought subprime mortgage in large bulk during the declining of house price fell into critical situation, and were bailout by U.S. government using the public funds.
Lehman Brothers, as one of the 5 major investment banks in U.S., who raised their rank by selling mortgage securities, suffered huge loss and went bankrupt in September 15 of 2008. The bankrupt of Lehman Brothers became the trigger for the global financial crisis.
The bankruptcy of Lehman Brothers which developed into a global financial crisis, causing the dollar to decline and the crash of stocks market. As the value of currency and stocks plummet during the financial crisis, the price of gold, which is a physical asset, rises relatively. This is because the holding of physical asset is the way to prevent the lost of value of one’s asset due to credit shrinkage.
The stagnant of stock market
When the stock market stalls, the gold price will rise.
Due to the bankruptcy of Lehman Brothers, the central bank of G7 countries, which are United States, United Kingdom, Japan, France, Germany, Canada and Italy, decided to cut their interest rate to lower the policy rate. However, the Bank of Japan didn’t join the coordination of interest rate cut, causing the yen to rise, heavily impacting the exporting industry, resulting in the plummet of stock price. The rise of yen against the stock price causing the economy of Japan to fell into deflation, which lead to the demand for gold and the gold price rises as a result.
Influence of currency exchange rate
Malaysia gold bullion dealers are affected by the currency exchange rate because they import gold from oversea. When they received orders of gold in Malaysia, they will purchase the required amount of gold from oversea vendors.
For example, when 1 dollar = 4 ringgit, we can trade 100 dollars with 400 ringgit, and using that 100 dollar to trade 1kg of gold, we are trading 1kg of gold using 400 ringgit. So, when the yen rise, 1 dollar = 3.80 ringgit, we can trade 1kg of gold with only 380 ringgit. In contrast, when the yen decline, 1 dollar = 4.20 ringgit, we will need to pay 420 ringgit to get 1kg of gold, so we can purchase more gold when the ringgit rise. However, that also means that when the ringgit rise, the value of gold become cheaper.
Effect of interest rate
Generally, gold is an asset that doesn’t have any attaching interest rate, so you won’t get paid with interest by financial institution or dividend like stock for holding it. Therefore, when the interest rate is high, the demand for gold will be low, but when the interest in low, the demand for gold will be high.
When the interest rate is high, people tend to go for financial products such as bank deposits, fixed deposits and savings-type insurance which provide can profit through interest, therefore gold which doesn’t pay any interest or dividend will have low demand. On the other hand, when there is instability in the world order or economy downturn, people will choose a more protective tactic in managing their asset by buying gold rather than proactively investing in currency and stock market.
Increase of consumption
Gold is a consumable resource, there are various applications of it, and the consumption of gold is expected to increase continuously in the future.,
For example, circuit board that constructs the electronic circuit in devices such as computer smartphone uses gold plate for their surface finishing because of their great conductivity. Other than that, there are also actual applications that use gold in odor removing chemical product. Also, gold is also an essential material for the battery of automotive, as the utilities for automotive become more widespread, the consumption of gold will continue to rise.
Because the usage of gold is increasing corresponding to the development of technologies, so as the consumption of developing countries increase, the global usage of gold will grow exponentially. As the demand for gold grow, the price of it will rise accordingly.
The investment boom
When there is a boom in gold investment, the futures market will be hotter compared to the spot market and the demand will drive the price higher. Rather than focusing on one financial instrument, investor tend to disperse their risk by investing in various financial instruments such as stocks, unit trust fund, bonds and gold.
Other than the physical gold, there are also financial products like gold ETF, which is different than investment that require professional knowledge like gold futures, where anyone can start investing using small amount of money.
Thus, when the trend of investing gold is developed, the gold price will be easily driven up.
Trading with leverage
Gold trading includes the futures trading. In the futures market, the transaction does not involve physical gold, but the transaction of margin or credit instead, so it is possible to trade the non-physical gold with leverage.
Leverage refers to a financial technique which by borrowing funds to enable the investor to trade with a capital several times of its original fund in order to maximize the profit. Although the upside is being able to maximize the profit, but it is also very risky in return.
For example, when trading 100,000 ringgit worth of futures using 10,000 ringgit, the leverage is 10 times. In order words, the futures market as a whole is leveraged and traded at a price higher than the spot market. This is called margin trading. Incidentally, when trading 100,000 ringgit worth of futures using 10,000 ringgit, “margin call” will happen when the position is in loss, where additional payment is required to increase the margin due to the position in loss.
However, the futures market tends to affected by large financial institution such as investment bank and hedge fund. For example, if dumping happens when the gold is rising, the physical gold price might also plummet as a result. Therefore, it must be noted that the margin trading in the futures market can directly affect the spot price of gold.
Gold is a highly valuable asset throughout history
Historically, gold is a highly valuable asset, it appears in the history all around the world.
For example, in the history of Japan, when Shomu Emperor took the holy vow and build the Great Buddha in Todai-ji, the Buddha was plated with gold. Also, Sado as the territory of Edo Shogunate was used as mine for gold and silver. In the other part of the world, gold was also used to make gold coin in ancient Greek and Roman. In the modern age, when the gold was discovered in California, various technology was developed to mine the gold.
As shown, throughout human history, the asset value of gold has been high and is used in producing a huge variety of products.
The reason of gold price soaring
Currently, as the gold price is soaring, we will introduce about the reasons why.
Russia Invasion of Ukraine
In 24th February 2022, the invasion of Ukraine by Russia begins and the conflict escalated, the global economy was heavily impacted, as a result, the price of crops and energy spiked. When there are drastic changes in the global world order, the asset value of currency and stock tend to decrease, identical to all previous conflicts and war.
As the invasion begins, the ruble moves wildly, and the stock price also experienced a sudden plummet but recovers its loss. In contrast to the currency and stock, the gold price was rising steadily.
The price might fluctuates depend on the outcome of the conflict of Russia and Ukraine, so it is full of uncertainty currently.
Depreciation of yen
The depreciation of yen or other currency can result in the rise of gold price. The dollar to yen rate is said to be the highest in 20 years, it reaches 135 as of July of 2022. The Japanese yen depreciate because as central bank of other developed countries, such as central bank of America - Federal Reserve Board (FRB), starts to implement monetary tightening to fight against the soaring raw material price due to the Russia-Ukraine invasion, the Bank of Japan keep the interest rate unchanged.
During the implementation of monetary tightening to fight against the global financial crisis, the coordination of the major developed countries is required. However, because Japan did not follow the step of other developed countries, therefore yen depreciated as a result.
The reason Japan didn’t participate in the monetary tightening is because of the target of 2% price stability since April of 2013. The target couldn’t be achieved under the Abe administration, and the Coronavirus pandemic heavily dragged down the economy, Japan is still yet to recover from the economic slowdown caused by the pandemic. If Japan implement monetary tightening together with other countries under this situation, it can lead to a further economic downturn. Therefore, due to the significant difference in economy condition and inflation rate compared to United State and Europe countries, Japan decided not to increase the interest rate.
The depreciating of yen resulted from the interest rate policy of Japan’s central bank leads to the soaring of gold price. Because when trading gold in Japan, it is compulsory to exchange yen for dollar because the gold price is directly tied to dollar. Therefore, when the dollar to yen exchange rate is high, the gold become expensive too.
This situation may not last long however, as there is a possibility that the change of situation between Russia and Ukraine may reverse the current high dollar to yen rate.
If the yen becomes strong again, the price of the imported gold will decrease. Therefore, even though its full of uncertainty, the movement of dollar to yen exchange rate should be focused on.
The long-term forecast of gold price
Below we will talk about the long-term forecast of gold price
The gold rise scenario
We can see that due to the Russia invasion of Ukraine, the gold price starts to go uptrend. As mentioned before, gold is a valuable mineral resource and is being used in devices such as computer and smartphone. Especially, the electronic products will not decrease and will continue to be used in various new ways which will lead to the increase in consumption of gold in the future. In contrast to the limited supply of gold, the demand of it is high, therefore it is considered as asset safe haven.
Even though the impact of cost-push inflation caused by soaring energy and raw material price still remains, Japan implements financial easing quantitatively and qualitatively by manipulating the long- and short-term yield rate through Yield Curve Control (YCC). Because the financial easing is implemented under the environment of monetary tightening by the global major developed countries, therefore as long as the price of goods and services (excluding the already soaring energy and raw material price) does not rise, the financial easing is expected to continue.
If the Bank of Japan cannot achieve the target price stability of 2%, and the sluggish economy continues, the fund will be more likely to flow into gold instead of currency and stock under this low interest rate environment. Although there can be short-term retracement in the gold price, but the factors mentioned above has lay a foundation for a long-term uptrend.
The gold fall scenario
As the countries around the world are starting to recover economically from the damage dealt by the pandemic, the uncertainty towards the economy is expected to fade away gradually. On top of that, if Russia and Ukraine cease fire, the global situation will start to stabilize, and investors will turn away from gold.
In Japan, as the term for the president and vice-president of Bank of Japan will be ending at March of 2023, new president will be appointed, and the target of price stability of 2% might be changed. If that happens, they might switch to monetary tightening policy if they stopped pursuing the price stability target.
However, if the Bank of Japan managed to achieve the 2% price stability target and continue to maintain it, the economy is very likely to bloom, properties and stocks will be more attractive than gold at that time.
Conclusion
The market of gold can be affected by the price of physical gold and futures contract. Therefore, gold’s value can be represented in 2 ways which is as raw material or as an asset. The gold price in the market is determined by the balance of demand and supply, if the demand is higher than supply, the gold price will rise due to its scarcity. In fact, gold is widely used in electronic devices such as computer and smartphone, since the usage of these electronic devices are expected to continuously increase in the future, so the gold price is most likely to rise even higher in the future.
Furthermore, the penetration of computers and smartphone into the developing countries will increase the consumption and can improve the technology, which will drive the demand of gold higher, this will eventually lead to the issue of gold insufficiency.
On the other hand, the price of gold as an asset can be affected by currency, which will fluctuate based on the monetary policy and foreign exchange market. Especially due to the fact that gold is traded with dollar, if the dollar to yen rate is low, gold can be bought with larger amount in yen but the value will drop. In the other way round, when the dollar to yen rate is high, the value of gold will rise in contrast to the lower amount that can be bought with yen.
Also, gold is considered as safe haven of asset, its demand will spike when there is uncertainty in the economy and international situation, or when there is a financial crisis. The reason that the gold price will rise during global uncertainty is due to the mindset that physical asset is safer than liquid assets such as currency and stocks. When a country is in crisis, or a company undergo bankruptcy, their correspond currency or stock will lose its value completely. On the other hand, by holding the physical gold, the value of gold itself will not change regardless of the circumstances, which is why investors choose to invest in gold.
In the trading of gold, there are financial instruments such as futures and gold ETF, through margin trading with leverage, there are larger amount of fund flowing in these markets compared to spot market. The movement of gold price in these markets also become complicated due to the trading activities of investment companies and hedge fund.
The future of gold price in long term is expected to rise continuously due to the increasing demand and insufficient supply. That being said, the gold price can still experience a short-term decline when the impact of coronavirus fades away or when the situation of Ukraine starts to stabilize.
As for Japan, several factors such as whether the Bank of Japan choose to continue aiming for price stability target of 2% can cause the gold to fluctuates. Other than that, the continuation of low growth state, and the current monetary policy transition from easing to tightening through the current Yield Curve Control can also cause temporary fluctuation to the gold price.
Therefore, if you are going to trade gold, its is worth paying attention on international situation such as Covid-19 pandemic or conflict in Ukraine, or movement of domestic central bank, to choose the best timing for yourself to buy.
