Gold prices just rose to a three-week record. But why? Look no further than Beijing to get your answer.
China devalued its currency two times this week, first by 1.9% on Monday and then a further 1.6% on Wednesday. Tremors were felt across global financial markets following this latest news, as investors and analysts attempted to figure out what this meant.
Sifting through the chaotic swirl of opinions and financial moves is one discernible trend in investor behavior; they are running from risky investments and parking their wealth in precious metals such as gold and silver.
Beijing’s move came on the back of its recent trade balance report, which shocked global markets with the fact that for the month of July, China’s exports declined by an astounding 8.9% year-over year. Export numbers declined to $190 billion. The country’s trade surplus tanked by eight percent to $42.3 billion, as all indications point to a real slowdown in the Middle Kingdom’s economy.
Other cracks are appearing, with the country’s producers feeling deflationary pressure. China’s producer parity index (PPI) surprised analysts by falling 5.4% in the last year, compared to an average 4.7% year-on-year decline in the first seven months of this year.
Translation: production is declining, and fast.
This is bad news for Chinese investors, as all of their yuan-denominated assets have now effectively been devalued. Facing this devaluation and speculation of further cuts to come in the value of their money, where does your average investor turn?
China’s Currency Devaluation Rewrites Gold Price Outlook
In steps, gold is the safe haven for parking your liquid cash during an unpredictable point in the stock market. This is a classic crisis phase in which gold’s simple utility becomes obvious to all but the most uninformed.
Have Chinese citizens already begun to hoard the yellow metal? It’s difficult to tell, but many of them have certainly wizened up to the abrupt and heavy-handed monetary policies of their government. The proof is in the pudding, as they say, and gold just experienced a five-day rebound to close at a three-week high.
But China’s effect on gold prices could have a long way to go still. Here’s how things might unfold in the coming weeks and months.
The People’s Bank of China (PBoC) lowered its interest rate four times since last November, and such rate cuts are likely to keep coming. There is even the possibility of their printing more yuan, increasing the physical money supply but putting inflationary pressure on purchasing power. The result of either or worse, both moves, would put even more negative pressure on the Chinese currency and cause people to flock to gold
Could other countries follow suit?
Following its currency devaluation, China has essentially made its products less expensive relative to other global exporters, and cheaper to purchase with foreign currency such as U.S. dollars. This will have the effect of boosting China’s limping exports, while Chinese citizens will simultaneously find foreign exports more expensive and demand for them will drop.
But this is not a secret strategy or complex economic meta-strategy. What’s to stop other export-oriented economies from following China’s example and devaluing their own currencies to stay competitive?
This is called a currency war. And while it sounds good on paper, it’s essentially a race to the bottom where everyone loses.
What is Our Gold Price Forecast for 2015?
What does it mean for investors when currency is decreasing in value? Commodities that retain value during deflationary periods, most especially gold, are the safest place to put their money. Wealth preservation takes centre stage, as investors rush to buy gold and silver, driving their price up.
Will this delay the Federal Reserve’s interest rate hike?
Because China is the United States’ second-largest trade partner, this devaluation in the yuan could have significant effects on trade flow between the two. Put simply, an artificially weak yuan and rising U.S. dollar could put a substantial dent in American multinationals’ profit margins.
Don’t believe me? The stock market certainly does. The Dow Jones, NASDAQ, and S&P 500 have all been falling for several days now, as markets are adjusting to this latest news from China.
But how will the U.S. Federal Reserve react to all of this? Speculation abounds, of course, but some hard facts are worth mentioning. If the Fed decides to raise interest rates, this will all but certainly raise the dollar’s value, making it even less competitive in international trade.
A delay in the interest rate hike is a bullish sign for gold, as investors will seek to shift their money into something stable for the time being. Furthermore, if the stock market keeps on declining, gold should attract more investment due to its historic safe haven status.
If the interest rate must be raised at some point, what does mean for gold?
Again, all signs point to a bull market. The first area to be affected when the interest rate is raised is the stock market, which has become far too comfortable in a climate of low interest rates. Much of the growth seen since 2009 has stemmed from these conditions, and once the rate is raised, a great deal of volatility could erupt.
It’s at this point that gold will really shine, serving as the financial bedrock for investors looking for something stable.
Forecast for Gold Prices in 2015
At this point you might be thinking about investing in gold, and you’re certainly not alone. Lots of smart investors have woken up to where the economy is headed, and are looking to diversify their portfolio with gold.
But where should you begin? Luckily, our top analysts have written special reports to help you make the most informed decision. Check out our special FREE report, “A Golden Opportunity for Stock Market Investors.”