Gold is one of the most controversial metals in the world. On the one hand, there are gold-bugs, like Stanley Druckenmiller who believes strongly on the yellow metal. On the other hand, there are gold bears like Warren Buffet, who have decried the metal as a scam. Warren is bearish on the metal because it does not have any major use and that it does not pay a dividend. In fact, as shown below, the S&P 500 has been a better performer than gold in the long term. When you add the dividends, the increase is even more observable.
Gold proponents argue that the metal’s historic use make it a desirable holding for the long-term. In fact, they believe that the fiat currencies like the dollar hold no value because they are backed by nothing. However, there is a consensus that the price of gold is somewhat related to that of the USD. This is because around the world, gold traders use the dollar. Therefore, when the monetary policy in the US tightens and the dollar strengthens, gold tends to weaken.
This month, the price of gold has been on an upward trend for a number of reasons. First, investors expect the Federal Reserve to leave rates unchanged. Others expect the Fed to lower interest rates as they move to support the economy. In fact, this could happen if Trump’s nominations of Stephen Moore and Herman Cain is confirmed.
Another reason why the price has been gaining is that China has become a major gold buyer. According to the People’s Bank of China (PBOC), the central bank bought more than 360K ounces of gold. Its gold reserves now stand at more than 60.62 million ounces. This buying comes at a time when the country’s economy is slowing and when it is engaged in a major trade conflict with the United States. This buying has added support to the metal at a time when it is competing with the soaring stock market. This year alone, the major indices in the US have gained by more than 10%.
Therefore, there is a likelihood that the price of gold could continue moving higher. If it does, it may first hit the important resistance level of $1320.