U.S Inflation is the biggest bullish factor for gold. This is because gold is traded in dollars and if the value of the dollar decreases, the value of gold will increase. Gold is also a store of wealth - when people see their savings vanish in an inflationary currency, they turn to gold to protect their purchasing power over the long term.
With the global economy weak, central banks are more concerned about deflation than inflation. Monetary policy is being used to fight off deflation and promote a healthy inflation rate in the economy.
If the efforts of the central banks succeed the price of gold will benefit.
The Central Banks.
The U.S federal reserve has been keeping the world in suspense regarding the timing of its future interest rate hike. The bank is delaying this decision because the global economy is simply too weak to endure any large shocks.
Interest rate shock, coupled with the uncertainty of the U.S presidential election, could cause some degree of economic panic.
Rate hikes tend to make the dollar index stronger and this will generally hurt commodities. With the price of oil already so weak – and the U.S stock market often moving parallel to oil – a commodities collapse is something no one wants.
In addition, the markets seem to have very little faith in the economy. When we compare these miniscule rates, that now seem required, to the rates in years past the global economy does not look very strong. Going up to rates of even 5 percent, as they were before the global recession, seem like an impossibility in this economic climate; now we talk about fractions of a percent.
How strong can an economy be if a rate hike of several basis points is enough to send markets into freefall?
Europe.
The economy of Europe also seems too weak to withstand a rate hike in the U.S.
The fallout from Britain’s ‘Brexit’ referendum has not yet reached its conclusion. It has been found that the UK’s parliament has the ability to outright reject the Brexit decision. Not only does this back and forth uncertainly make it less likely that the U.S will raise rates, it also adds strength to the U.K pound – a currency that is currently undervalued due to speculation about Brexit.
Strength in the pound will weaken the dollar and consequently strengthen gold. If the U.K actually reverses course from its Brexit referendum the effects on both the dollar index and gold will be immense.
European Central Bank (ECB) is also in the spotlight; investors are wondering whether or not it will extend its stimulus program (a bond buying spree to the tune of $1.91 trillion) beyond march of next year. A decision on this issue will probably be reached on Thursday October 21, 2016.
Most likely the program will continue, if not be extended. The bank has a target of 2 percent annual inflation and inflation is currently not even at 1/4th that amount.
Conclusion
The uncertainly in the U.S economy calls into question the likelihood of an interest rate hike before 2017; the global economy is still weak and collapse in the commodity sector would make this issue worse. In addition, concerns over a reversal of Brexit in the U.K give strength to the pound and may weaken the dollar.
The ECB is also likely to continue on its dovish course, if not expand stimulus going forward this raises the likelihood of commodity boosting inflation. The long-term prospects for gold investors are uncertain but fundamentally strong
