Gold Valuation Determinants

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Gold is a precious metal commodity that is chosen by central banks as a store of value. Trading Economics has published that United States, Germany, Italy, France and Russai are the top five countries with reserves of 8,133; 3,359; 2,452; 2,436 and 2,299 tons respectively. Looking at yearly production China tops the list with production of 420 tons followed by Australia and Russia with 330 and 310 tons. United States produces 200 tons and ranks fourth place in production. Hence gold value is affected by big players which store the commodity in vaults and sell or add to their stocks according to their financial needs.?

While sanctions can be applied strictly?on financial institutions, they are less effectively applied on gold sales as the commodity is easy to move and can be exchanged to cash instantly. On the contrary restrictions on oil can be implemented on shipping companies and origin. ?In my opinion gold will benefit from the European crisis to a lower extent than oil as it is more difficult to monitor payment and shipment of gold. The price of gold has increased from 1800 to 2050?an ounce equivalent to 13.9% while brent has increased from 80 to 120 equivalent to 50% . (Price of gold has declined to 1989 and oil 110 at the time of writing this article)?

Gold Valuation determinants?

Not a determinant? Does not have cashflow?

Weaker gold? Stronger dollar?

Weaker gold? Rising interest rates (stronger dollar)?

Weaker gold? Lower political uncertainty (Ukraine crisis resolution)?

Stronger gold? Escalation of Ukraine crisis?

Stronger gold? Un battled Inflation?

Weaker gold? Declining inventories at Central Banks?

Weaker gold? Sanctions on gold trade can’t be monitored?

Weaker gold ? Russai third largest producer of gold 310 tons?

Stronger gold? Rise in commodities oil and wheat. Positively related to gold ,but not perfect correlation.?

Factors that affect gold price.?

• An anticipated increase in interest rates of 25 basis points in March and an additional 1 to 1.25% for the remaining 9 months. Higher interest rate translates to stronger dollar, which pushes down gold price. ?
• Russia might use some of its reserves to avoid the imposed sanctions. ?
• Gold is a good inflation hedge and performs better in periods of high inflation. So this factor pushes the price of gold higher if monetary policy is not effective in containing inflation. Fear of stagflation due to the flattening of yield curve. The?question that persists will inflation be tamed by higher interest rates??

Recommendation??

So my call on gold is scenario based. If there is peace in Ukraine then my call is sell gold and short oil. However, if the crisis is prolonged and the elevated price of oil feeds into inflation while monetary policy is less effective?due to slower economic growth, then the price of gold will remain to be elevated and may increase to higher levels.??