Financial News Drives Gold Prices Up and Down
How Bullion Prices Have Reacted to Recent News Releases
Apr 21, 2009
Rule number one for analyzing gold prices is to expect the unexpected. Logic and reason often don't apply when short-term gold market forces are at work. That’s because human psychology works behind the scenes to manipulate gold prices. Like an out-of-control pinball machine, gold prices move erratically due to strong push-and-pull emotions like fear and greed. These intense and often fleeting emotions cloud investors’ minds when trying to decide whether to buy or sell.
It gets crazier.
Consumers are continuously bombarded with confusing news stories that one day speak hopefully of a full economic recovery. The very next day can feature media reports of grim layoff announcements suggesting that America is sinking into a depression.
Still, gold price movements are reasonably consistent depending on the type of press release. This analysis discusses how bullion prices react to specific categories of financial news.
Stories Driving Gold Prices Up
Increased demand for bullion is associated with the following types of news stories.
- Reports of higher inflation or a lower U.S. dollar
- Sobering news of business failures or negative economic developments
- Announcements of countries buying more gold to add to their reserves.
On February 17, 2009, President Barack Obama signed into law the American government’s $787 billion economic stimulus package. Gold prices then moved 6.4% from $967 per ounce on the day prior to Obama’s signing to $1,001.80 on February 20 - attaining bullion’s high so far in 2009.
Gold is often marketed as a hard asset investment that protects both consumer wealth and purchasing power. Therefore, any news that reminds people of a potential inflationary spike or a weakening of the U.S. dollar will cause a short-term jump in gold prices. As stimulus funds work their way through the American economy, increased demand forces prices up. As well, a devalued U.S. currency means that more American dollars are needed to buy gold thus driving up bullion prices.
Secondly, grim business headlines like General Motors firing 1,600 of its office workers or Bank of America’s lingering credit losses will boost gold prices at least temporarily. News of these business or economic failures scare investors to search out safer havens for their money. Emotionally, that’s when gold glitters most brightly as a more secure store of value when compared to stocks.
Thirdly, gold prices also go up when any country announces plans to increase their bullion holdings. China has $2 trillion in reserves, much of which is held in U.S. dollars supplemented by only 1% in gold. A recent story that China was interested in buying more gold as a strategic commodity immediately boosted bullion prices. Similarly, demand for bullion went up on the news that other nations including India, Russia and Taiwan were also interested in expanding their gold reserves.
Announcements Pulling Gold Prices Down
The other side of the coin is that gold prices tend to fall for the following 3 types of announcements.
- Reports of a stronger U.S. dollar
- News of sustained improvements in company earnings or a booming global economy
- Notifications that suggest a large increase in the physical supply of gold.
A higher-valued U.S. dollar tends to depress gold prices. Bullion prices are denominated in American currency, so that as that currency strengthens it takes fewer dollars to buy the same amount of gold. This in turn drives down prices for the precious metal.
News that the U.S. economy is gaining traction also diverts demand away from gold and into business-related sectors of the stock market instead. For example, gold prices recently fell while the share prices for 3 large U.S. financial institutions (Goldman Sachs, J.P. Morgan and Citibank) rose after reporting earnings that surpassed market expectations.
Finally, any news release that suggests an oversupply of gold will pull down bullion prices. On April 3, G20 nations endorsed the International Monetary Fund’s plan to sell 403 tons of gold. On that announcement, gold futures immediately fell 2.2% or $20.30 to $905.80. At today’s price of $883.30 per ounce, buyers are still paying about 5% less for an ounce of gold than the going rate of $926.10 on the April 3 announcement date.
Research Facts Before Deciding to Buy or Sell Gold
Conflicting news releases can affect gold prices at the speed of light. Often these financial headlines are ambiguous or misleading. The result is that gold prices can bump up or slide down before investors thoroughly understand the complete set of facts associated with isolated but seemingly urgent bits of financial information.
For example, an analyst from Seek Alpha carefully studied the G20 communiqué and found that the IMF endorsement to distribute 403 tons of gold was merely a confirmation of a prior agreement. At today’s gold prices, the planned sale represents a modest $6 billion or 6.7 million ounces of gold that will flow through the London Market over the next 2 to 3 years.
Even if the IMF changes its collective mind and decides to immediately divest all 403 tons of its surplus gold, the average daily ounces transferred at the London bullion market was 23.8 million ounces this past February. Therefore, G20 announcement involves only about 6.3% of total bullion that London processes in one day.
Prudent investors need to consider to put that financial news story in perspective with China’s appetite for gold reserves, which represents potential demand for bullion many multiples higher than 403 tons.
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