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Home » Online Forex Trading Blog » Why Gold Prices Are Set to Drop

Why Gold Prices Are Set to Drop

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During these tough economic times, we’ve seen a lot of fluctuation in the prices of a lot of companies, stocks, bonds, and even commodities.  While Wall Street suffered crashes in the Dow Jones and stocks saw their value plummet some 40 to 50%, a lot of people wondered how anyone could possibly make their money in this kind of economy.

Meanwhile, oil prices plummeted.  Gold prices increased.  But what is going to happen in the future, and how can we better understand the current context we’re experiencing?  To delve further into these questions, this article will look at the recent fluctuations in prices to see if we can make some sense of it – and maybe make a prediction or two.

If we’re going to look at the potential that gold prices will drop, however, we’ll have to have a deeper understanding of market fundamentals, supply and demand, and exactly what the history of gold prices might suggest about their future.  In this article, we’ll explore each one of those topics in-depth to see if we can make some educated guesses about the price of gold – and why it might be headed for a drop.

Where have gold prices been?

Investors flock to a commodity like gold in periods of inflation and economic turbulence, which might explain why gold prices have soared to over 900 points recently.  But have they really “soared”?  What exactly is the price of gold at, and where has it come from?

As of this weekend, the price of gold is around 923 U.S. dollars – certainly an impressive number, especially given that these gold prices are based around just a troy ounce of gold, some thirty-three grams of the precious metal.

Historically, gold prices have continually increased ever since President Richard Nixon lifted the gold standard in the early 1970s – the ability of the U.S. government to print dollars has lead to great gold value in terms of these same dollars.  We can’t deny that the long-term trend has seen gold rising consistently for around thirty or forty years – as the supply of money increases, the relatively stable gold supply keeps it in check.

Where are gold prices going?

It’s easy to describe where gold prices have been; it’s quite another thing to describe where they appear to be going.

One indicator that many people enjoy looking at when it comes to the price of gold is the performance of the Dow Jones Industrial Average (DJIA).  As stocks tumbled in late 2008, the price of gold increased, as a few investors called for many of their clients to get out of the market temporarily and put their assets in a commodity like gold.  This increase in demand quite simply leads to higher gold prices.

This dynamic is not an exact predictor of gold performance – one can’t look at the DJIA and expect to accurately predict where gold has gone.  But in terms of long-term trends, you can make educated guesses as to the price of gold as it relates to the market.

So why will gold prices drop this year?  Because we expect to see a “Bear market rally” – that is, a small rally in stocks as they temporarily regain their former positions before finally taking another dip to their ultimate “basement,” or lowest-level prices.

This rally, which seems to have kick-started just recently, is unpredictable.  It could last for weeks, for months, or as some experts predict, even years.  Much of it will depend on the overall confidence of investors who might be plugging their money back into the stock market, looking to capitalize on what they perceive as cheap, available stocks.

With higher confidence in stocks, investors will have less reason to remain in gold, which may drive down demand for gold temporarily.  Bear in mind that at this stage, you’ll also have to make sure to check the supply of gold – watching the news – to make sure that a dip in supply won’t effect the price of gold in a way you didn’t predict.

Some words of warning

Keep in mind that this predict comes with a warning:  caveat emptor.  Buyer beware.  While there is good reason to expect that the long-term trends of the market are pointing to a possible drop in gold prices this year, there is no guarantee.  Remember to take any investment advice you receive with a grain of salt.

Be sure to keep your money as diversified as possible without overcomplicating your portfolio.  It’s not enough to own gold;  own stocks, bonds, heck, you could even own cash.  The more solid investments you make, the more you’ll be able to weather – and even capitalize – the current economic conditions.

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About the Author -

Rebekah ManningRebekah started in the Forex industry as an intern in 2001, and worked her way up the ranks to a C-level management position. She enjoys the field of trading as well as MMA fighting, shooting ranges, and action movies.

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