Gold defies general commodities rout, what does the future hold?

Gold has entered 2016 with gains and reached its highest price since the early days of November last year following the Chinese stock market nosedive and the chain effects it had on both the European and U.S. stock markets.

Following the gold’s price increase to all-time highs of $1,920 per ounce back in November 2011, it has generally been a period of decline and there was limited demand by traders not only because of its downwards trend but also due of a stronger U.S. dollar. However, during the first days of 2016 it has re-established its position as a safe haven security given the latest evidence of weakening stock markets. This characteristic allowed the yellow shiny metal to avoid the decreasing price effects on other commodities like the crude oil and copper which slipped as a result of the Chinese economy growth slowdown.

The precious metal has been one of the markets’ best performer and so demand for it has inevitably increased. On Friday, the price of gold increased by 1.1% and ended the weekly trading at $1,088.46 per ounce. However, on a weekly basis it decreased by 1.7% because fears over the Chinese economy have lessened.

The good performance came parallel and in contrast to crude oil’s price decrease. The price dropped to just over $30 per barrel on Friday following the on-going fall of the Chinese stock market and also the impending increase of crude oil exports from Iran. On the other hand, copper fell to its lowest level since mid-2009 as a result of the same fears over China’s stock markets. The big question now is whether gold’s rally during these first days of the year is the emergence of a long-term upwards trend or whether it is only a short-term increase before the price sinks with the rest of the commodities.

There are estimates by some that the U.S. dollar pressure might come to an end within the following weeks, and that the overall downwards trend of other commodities could be negative factors for the gold’s price. Upcoming incremental interest rate increases by the Federal Reserve (Fed) may also act as a variable into gold’s future price direction. Now that the Fed has moved forward with the first rate increase, markets could concentrate on other events. But there are also estimates that any future interest rate hikes, even small ones, could decrease demand towards gold as investors could be turning to higher-yielding safe haven assets such as U.S. government bonds.

The upcoming Chinese lunar new year is most likely to increase demand for gold and that alone might maintain prices at high levels. But that is only temporary, and gold bears forecast that the current rally might come to an end given the lack of inflation. Would you keep your faith in gold?

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