Emerging Markets And Supply Help Support Growth In Gold

Monday, March 14, 2016

the markets and goldGold has been a very interesting topic of discussion as of late…and for very good reason. Since the beginning of the year 2016, we've seen incredible growth in the price of the precious metal. In the beginning of the year, the primary driver on the price of gold was the fact that market conditions were overwhelmingly negative. While market conditions haven't improved quite yet, they are no longer the biggest driver in the positivity we're seeing in the precious metal. In fact, there are two big reasons for the growth we're seeing. First and foremost, we're seeing heavy demand from emerging markets. On top of the strong emerging market demand, we're also seeing support in price growth from dwindling supplies of the precious metal. Here's how everything is going on these two fronts...

Emerging Markets Are Fueling Gold's Price Growth

Gold, as with any other commodity is largely dependent on the law of supply and demand. However, it's value is a bit more complex than the average commodity because it is a safe haven. Therefore, when we see poor movement in the market, in currencies, or in economies, we tend to see gains in the value of the precious metal. That's exactly what we're seeing from emerging markets. Ultimately, the market hasn't been very positive for the emerging sector and it has driven fear among consumers and even governments in the sector. In the past 12 to 18 months, we've seen drastic declines in currencies like the Vietnamese dong, Malaysian Ringgit, and Indonesian rupiah. As a result, consumers, businesses, and governments alike in these countries have been purchasing physical gold like it's going out of style as a way to keep their money safe.

In China, we've seen quite a bit of state buying, but the bigger story is the Chinese public. The public in China has been pulling money out of stock and buying gold, leading to increased demand in the world's second-largest economy. All in all, emerging market economies are struggling, and as a result, we're seeing heavy demand for gold in these markets.

Supply Is Also Helping To Support Growth

As mentioned above, both supply and demand play a drastic role in the price of gold. When it comes to demand, emerging economies are definitely leading the charge. However, supply is also building support for price growth. That's because production of gold is starting to falter. On January 17th, it was announced that the world's largest gold producers believe that we have hit peak supply. That means that from here forward, it's likely that production of gold will fall. In fact, it is expected that throughout this year alone, gold's production is going to fall by about 3%, and more declines in production are on the way next year as well.

What We Can Expect To See Moving Forward

Moving forward, I have an incredibly bullish opinion of what we can expect to see from the price of gold. The reality is that supply is falling and demand is rising. However, it's worth mentioning that while emerging markets are the leaders in the growth in demand that we've seen, they are not the only markets seeing a rise in demand for gold. In fact, right here in the United States, we're seeing a heavy shift toward gold as investors continue to fear what's coming next in the stock market. Considering the facts that supply is declining and demand is only likely to climb from here, I'm expecting to see further gains in the price of the precious metal as time moves forward.

Joshua Rodriguez

Joshua Rodriguez is an avid financial professional. He is the owner and founder of CNA Finance, a partner at Modest Money, and a writer for US News & World Report, Investing.com, and more! Joshua takes a strong fundamental approach to market analysis and enjoys offering his take on what we can expect moving forward. You can reach Joshua at cnafinancehelp@gmail.com.