Analysing the Factors Influencing
the Price of Gold: A Study of
Macroeconomic Variables and
Investor Sentiment in the Global
Market.
By Mark Castro
GOLD THESIS 13/02/2023
BY ENIGMA
Table of content
Summary
Inflation
Unemployment
Commitment of
Traders
Technical Analysis
Conclusion
Summary
Gold is a valuable investment asset that has been popular
Table of content
for centuries due to its unique properties and scarcity.
Recently, with increased volatility and uncertainty in
financial markets, gold has once again become an
attractive investment option.
I aim to analyse the performance of gold by using various
data sources, including fundamental, technical, and
Commitment of Traders data. By examining these factors,
the author hopes to provide a comprehensive
understanding of what drives gold prices and to provide
insights for traders on how to approach trading this
precious metal.
The study could explore macroeconomic factors that
affect gold prices, such as inflation, interest rates, and
currency exchange rates, as well as the role of investor
sentiment in driving demand for gold. Historical data and
trends could be analysed, and surveys or interviews with
market experts could be conducted to gain a deeper
understanding of the factors that drive gold prices.
Overall, the thesis will provide a thorough analysis of the
factors that influence gold prices and provide valuable
insights for traders looking to invest in this precious metal.
Inflation
Fundamental analysis is a crucial tool for investors
looking to gain insights into the underlying factors
driving gold prices. By analysing fundamental data,
such as economic indicators, inflation rates, and
central bank policies, investors can gain a deeper
understanding of the forces that influence gold
prices. For example, if economic indicators suggest a
recession is looming, investors may look to gold as a
safe-haven asset, driving up prices. Similarly, if
central banks are pursuing expansionary monetary
policies, investors may expect inflation to rise,
making gold a more attractive investment. By
examining these underlying factors, investors can
better anticipate price movements in the gold market
and make more informed investment decisions.
Overall, the use of fundamental analysis is essential
for investors looking to gain a comprehensive
understanding of the gold market and make wellinformed investment decisions.
Inflation
With that being said, let's examine the latest
economic figures in the US and explore their
potential impact on the price of gold. One of the
most important figures to consider is the monthly
inflation rate, which currently (2023) stands at
0.5%. While this number may not seem significant
on its own, it is worth noting that it represents a
notable increase compared to the previous figure
of -0.1%. This rise in inflation may prompt the
Federal Reserve to consider increasing interest
rates in an effort to control inflation.
Inflation
However, it's important to note that the current
level of inflation, when viewed on a year-on-year
basis, stands at 6.4%, just slightly lower than the
previous figure. This marks the seventh consecutive
month where inflation has eased in the US,
suggesting that the current level of inflation may not
be a major cause for concern. Despite this, the Fed
may still opt to raise interest rates, albeit at a slower
pace, in an effort to keep inflation under control.
Unemployment
Turning our focus to the US job market, we can
explore the potential implications of the current
unemployment rate on inflation. Since January 2021,
the US unemployment rate has seen a remarkable
decrease, dropping from 6.4% to approximately 3.4%.
While this decline is certainly welcome news for the
US workforce, it's important to note that lower
unemployment rates are typically associated with
higher inflation. This phenomenon is attributable to a
variety of factors, such as an increased demand for
workers leading to higher wages and subsequently
driving up household and disposable incomes, which
can lead to a surge in consumer spending.
Unemployment
As aggregate demand increases, businesses and firms
may struggle to keep pace, potentially resulting in
demand-pull inflation. The recent increase in job
openings, from 10.44 million to 11.01 million, has also
created over 500,000 new job opportunities,
prompting firms to compete for top talent with
higher pay, further fuelling the potential for demandpull inflation. While a robust job market can certainly
benefit the US economy, it is essential to monitor its
impact on inflation and consider potential measures
to address any issues that may arise. If the
unemployment rate continues to decline, the FED
may be prompted to take action, potentially
increasing interest rates or taxes to prevent further
inflation in the US economy.
COT
Next, let's delve into the Commitment of Traders
data, which provides insight into the net positions of
non-commercial traders in the gold market. Upon
reviewing this data, it is evident that these
institutions are net long by a significant amount, with
the majority of open interest reflecting this stance.
This signals that these institutions are actively
seeking to capitalize on a bullish gold market.
Notably, long positions have increased by 200%
more than short positions. However, it is also
concerning to see that non-reportable traders, such
as retail traders, are also net long on gold. When
assessing market sentiment, I often consider the
difference between the non-commercial and nonreportable positions as an extra confluence. In this
case, both groups are net long, which could suggest
further bullish movement in the gold market.
TECHNICAL ANALYSIS
Finally, let's take a quick
look at the technical
analysis of gold. When
examining the candlestick
chart on a weekly time
frame and reviewing it
quarter by quarter,
we can observe that there may have been a change in
direction in the last quarter, as gold failed to break the
Q3 2021 lows. It is noteworthy that we were bullish in
the first quarter of 2021, but as of now, we are
replicating the same movement from last year.
Upon further examination
of this time frame, we can
see that we have just
rebounded from a key
level of 1930,
where the gold market reversed from being bullish to
being bearish in Q2 2021. This may signal that gold is
currently overbought and could be ready to go
downwards, at least in the short term.
TECHNICAL ANALYSIS
Another key point to note is that we have failed to
stay above the crucial level of 1870, which was a clear
level back in Q2 2021. Considering the price action
alone, it wouldn't be surprising if gold collapses down
to the 1800 level before we start to consider long
positions in the market.
CONCLUSION
In summary, taking into account the current inflation
levels and decreasing unemployment rate in the US,
as well as insights from Commitment of Traders and
technical analysis, I expect gold to experience bearish
trends in the short to medium term, while the dollar
strengthens. This is due in part to the potential rate
hikes by the Federal Reserve, which could make the
USD interest rate more attractive compared to the
returns on gold investments.
Looking at technical data, we can observe a
significant decline in the value of gold in the second
and third quarters of 2022, which is consistent with
gold's cyclical nature. This trend continued until the
fourth quarter of 2022. Additionally, gold has
historically struggled to exceed $2,000, suggesting
that similar challenges may arise in the future.
Sources:
https://tradingeconomics.com/united-states/inflationrate-mom
https://www.usinflationcalculator.com/inflation/current
-inflation-rates/
https://www.statista.com/statistics/273909/seasonallyadjusted-monthly-unemployment-rate-in-theus/#:~:text=U.S.%20seasonally%20adjusted%20unempl
oyment%20rate%202021%2D2023&text=The%20seaso
nally%2Dadjusted%20national%20unemployment,rate
%20was%20at%203.4%20percent.
https://www.economicshelp.org/blog/571/unemployme
nt/trade-off-between-unemployment-and-inflation/