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Gold price hits a four-week high on market and political volatility

Thursday, January 7, 2016

International turmoil, both on the markets and politically, has sent the gold price soaring to a four-week high as 2016 kicks off on a strong footing.

Obeying the old adage that investors turn to gold as a safe haven for their cash in troubled times, the price of the precious metal rose from £726.47 per troy ounce at 09:00 on Monday (4 January) to £746.86 at 18:30 on Wednesday (6 January). At 09:00 this morning (7 January), the gold price had climbed further to £752.02.

The strong performance of the precious metal follows stock market falls across the globe, prompted by data showing a slowdown in the Chinese economy, plus unexpected political volatility. North Korea announced it had carried out a nuclear test, and earlier in the week, Saudi Arabia cut its diplomatic ties with Iran, leading to concerns about international stability.

Societe Generale analyst Robin Bhar told Reuters: “Some risk aversion prompting safe haven flows has helped gold to stabilise and now test resistance.

“Physical demand has been pretty strong at the lower levels. As we go higher, we could see some of that physical demand beginning to slow. Now we need investors to jump back in and look to hedge some of the uncertainties over global growth, over China, with positioning in gold.”

Analysts at MKS said the gold price was likely to “continue to take direction” in the short term from equities, changes in the value of the US dollar and Chinese economic announcements. They believe political factors will play a “lesser” role in determining the value of the precious metal.

Economic indicators

The falls in the gold price last year, which saw the metal lose 10.5 per cent of its value and end 2015 down for a third consecutive year, were mainly due to the apparent strengthening of the global economy.

However, as events have shown this week, there can be no certainty that will continue. Stock markets around the world were shaken on Monday after the main Chinese index fell by seven per cent and trading was halted early, following the publication of worse than expected manufacturing figures.

The sheer size of the Chinese economy means that any signs of weakness can have major repercussions on international markets. Peter Boockvar, the Lindsey Group’s chief market analyst, said that the Chinese economy “has been slowing for years” and events this week are “a wake-up call” to the markets.

Trends to watch in 2016

The strength of the US dollar during 2015 was another factor in lower gold prices last year. Gold prices are traditionally strong when the US currency is weak, and vice-versa. So the performance of the dollar is worth watching as part of your investment decisions.

Analysts will also be keeping tabs on the US Federal Reserve and whether – and by how much – it increases the cost of borrowing in 2016. At the end of last year, it increased interest rates by 0.25 per cent for the first time in almost a decade.

Plus, inflation will play a part in how the gold price behaves, with concerns about rising inflation likely to see the value of the precious metal increase.