Mechanism and reason for Soaring Gold Prices
In recent years, the gold market has risen significantly as you can see from the gold market price graph on this page. There are many reasons why the market has been rising in recent years, but the main reasons can be summarized into five. Uncertainty in the World Situation ~ Russia-Ukraine Conflict • Inflation anxiety • Globally low interest rates • Stock prices are unstable Rise of China, India, etc. I will explain why the gold market has soared in recent years in an easy-to-understand manner. Anxiety in the World Situation ~ Russia-Ukraine Conflict The war between Russia and Ukraine, which began in February 2022, is a major cause of rising gold prices. This is because gold prices tend to rise when geopolitical risk increases. In the past, when the world situation became unstable, such as the time of the 9/11 terrorist attacks that occurred in 2001, the price of gold tends to rise. There are various reasons for this, but one of the main reasons is that when the world situation becomes unstable, there is a growing tendency to believe only in real assets. Especially for gold, it has been established that it can be bought and sold at the same price worldwide, making it the most reliable asset among real assets. Compared to crude oil, its price movements are more stable, and many people probably buy gold in search of peace of mind when the world situation becomes uncertain. Once again, speculation that the world will be divided by a war between Russia and Ukraine is driving gold prices higher. In addition, this time, Russia, which is one of the world's largest resource-rich countries, is the party concerned, and the prediction that the world's energy situation will become unstable has further heightened anxiety and is a factor in the sharp rise in gold prices. It is. fear of inflation Inflation is happening all over the world, especially in the United States. In the United States, historically, inflation has progressed rapidly, and everyone knows that the Fed, the central bank of the United States, is desperately trying to suppress inflation by raising policy interest rates sharply. I guess. However, inflation in the United States does not know where to stop, it is progressing at a tremendous speed, and it is a form of anxiety in the future. Japan is no exception. Looking at the Corporate Goods Price Index and the Consumer Price Index, we can see that inflation has progressed to an unprecedented level. I am sure many of you reading this article are feeling the rise in prices that has not been seen in decades. The price of daily necessities has risen, and it is becoming impossible to buy things with the amount of money you used to buy. In other words, the value of currencies such as the dollar and the yen is falling. In this way, when inflation occurs, the value of currencies such as the dollar and the yen will fall, but the value of gold tends to rise. Because the future is uncertain. Many investors turn to real assets such as gold when the future becomes uncertain. It's similar to the anxiety about the world situation I mentioned earlier, but gold is a strong asset in times of emergency. Countries are desperately trying to keep inflation under control, but it's not going anywhere. In addition, considering that Japan has not raised its policy interest rate at all, it is hard to believe that Japan is currently seriously tackling inflation. If further inflation occurs in Japan in the future, there is a possibility that the price of gold will rise further. low interest rates worldwide Even though the United States has finally started raising interest rates, interest rates are still low worldwide compared to before the corona shock. With low interest rates around the world, the price of gold tends to rise. This is because there is not much interest in investing in bonds, etc. If interest rates are high, more investors will invest in bonds, etc., but low-interest bonds are less attractive to invest in. In other words, money gathers in assets other than bonds. Stocks are the first thing that comes to mind. However, as you can see from the sharp drop in US high-tech stocks, stocks are currently in a rather unstable situation. In such a situation, few people can afford to invest in stocks with peace of mind. Therefore, although it is a process of elimination, gold tends to be chosen as an investment target. Compared to stocks, you can't aim for big profits with gold, but it tends to have stable price movements, so many investors feel comfortable investing in gold. High liquidity is also one of the reasons for its popularity. It is quite possible that the policy interest rate will rise mainly in the United States in the future, but as long as the current low interest rate continues, the price of gold will continue to rise for a while. unstable stock price Instability in stock prices around the world, especially in the United States, is also a major cause of rising gold prices. If you can get enough profit from stocks and bonds, there is no need to bother investing in gold. However, if you can't make a profit in stocks, etc., you still tend to gather money in gold as a stable asset. In particular, U.S. stocks, especially high-tech stocks, continue to be quite unstable. Rise of China and India The rise of countries such as China and India also appears to be one of the factors driving gold's rise. For a long time, developed countries such as the G7 have played a central role in the global economy. However, since the beginning of the 2000s, the structure of the global economy has changed dramatically. In terms of GDP, Japan has been overtaken by China, and it is highly likely that China will overtake the United States and become the world's largest economy in the next few decades. Emerging countries generally tend to want to hold real assets such as gold for economic and diplomatic stability. In addition to China and India, there are many countries, especially in Southeast Asia, that are expected to experience significant economic growth in the future, so there is a possibility that gold prices will rise further. Benefits of investing in gold There are many benefits to investing in gold, but the main benefits of investing in gold can be summed up in four. ・Resistant to stock price declines ・Universal value standards - Resistant to inflation ・It must be a real asset I will explain the benefits of each gold investment in an easy-to-understand manner. Resistant to falling stock prices Since gold tends to move differently from other investment assets and currencies such as stocks and bonds, it can be expected to reduce the risk of price fluctuations for all assets by combining it with various assets to achieve diversified investment effects. Known as "emergency gold," gold has become a haven for funds in times of heightened uncertainty in financial markets and geopolitical risks, and its price tends to rise. When interest rates are high, gold with no interest or dividends is at a disadvantage, but when interest rates are low, gold's relative attractiveness increases. Falling global interest rates in recent years have increased the attractiveness of gold, which is believed to have led to higher gold prices. The gold price has entered 2022 and has updated its all-time high, and the yen-denominated gold price is rising rapidly. In 2020, it took about 40 years to update the high price. While it is difficult to predict future gold prices, the past rally and the current market environment have something in common in terms of periods of increased issuance of through-lending. It seems that it is becoming more attractive. On the other hand, gold, whose price movements are different from those of stocks and bonds, is increasing its presence as an investment target indispensable for asset management from the perspective of diversified investment. Reasons for this include the declining value of the key currency, the U.S. dollar, and the continuing supply-demand imbalance caused by global central banks buying gold at the fastest pace in 50 years. prize. There are various factors that cause fluctuations in the gold price, but past trends in gold prices are thought to be closely related to rising geopolitical risks and changes in the international currency system (gold standard system and managed currency system). The trend in gold prices since 1920 can be roughly divided into three rising periods. You can see why gold is strong against stock price declines, so please refer to it. After the Great Depression of 1929 (withdrawal from the gold standard) The gold standard system is a system that holds the same amount of gold as the currency issued by the central bank and guarantees the exchange of gold and currency, and the amount of currency issued is limited. At the time of the Great Depression caused by the Wall Street stock market crash in 1929, countries that were slow to leave the gold standard system were unable to implement prompt monetary policies because of their gold reserves. As a result, each country left the gold standard system one after another and adopted so-called impoverishment measures, such as raising import tariffs and promoting block economies in order to boost the economy. During the period from the Great Depression to World War II, the amount of currency issued by each country increased due to the withdrawal from the gold standard system, and the gold price rose. 1970s after 1971 (Nixon shock and rising geopolitical risks in the Middle East) Since the latter half of the 1960s, the United States' gold reserves have been declining sharply against the backdrop of deficits in the balance of payments due to the prolonged Vietnam War and other factors. In 1971, the United States unilaterally suspended the exchange of gold and the US dollar. (Nixon shock) The Nixon shock is the transition of the United States to a controlled currency system that allows the issuance of currency at its own discretion, without the premise of gold, in order to increase the degree of freedom in its own economic activities. As a result, the foreign exchange market shifted to a floating exchange rate system. Gold prices soared due to the unstable situation in the Middle East leading up to the two oil crises and the Soviet invasion of Afghanistan. 〈Since 2000 (increase in geopolitical risk, rise of emerging countries, introduction of quantitative monetary easing policy)〉 Increased geopolitical risk triggered by the September 11, 2001 terrorist attacks in the United States, as well as rising demand for gold due to economic growth in emerging countries such as China and India, have contributed to the rise in gold prices. is cited as the background of Furthermore, since the economic recession after the Lehman Shock, the central banks of developed countries have introduced quantitative monetary policies, and the expansion of asset balances through the purchase of government bonds is one of the factors behind the price rise. In this way, gold has repeatedly shown its presence as an asset that rises when stock prices fall. Global standard of values The gold standard is now over. Since the days of the gold standard, the value of gold has not changed. Gold is still held as a reserve asset in central banks around the world. The reason why central banks around the world hold gold is that the possibility that the value of banknotes issued by each country will become zero is never zero. In the unlikely event that the value of the country's currency or the currency of another country becomes zero, the value of gold will not become zero, so many countries have gold for risk hedging. resistant to inflation Gold is considered an inflation resistant asset.As explained earlier, gold is a limited and scarce asset, so it always has a certain value. As the value of gold increases, the price tends to rise. Inflation resistance is also a big advantage of gold. being a real asset Gold is said to have value due to (1) its rarity as a finite asset and (2) its characteristics as a real asset. In addition, one of the reasons why the value is not lost is that the quality does not deteriorate. ①Rarity ・Total amount of gold produced so far (approximately 4 Olympic swimming pools) ・Annual production: 3,300 tons ・Estimated burial volume: approx. 50,000 tons (minable period: approx. 15 years) ② Characteristics of real assets Since there is no credit risk of the issuer unique to financial assets, the issuer's bankruptcy will not cause the value to become zero like stocks and bonds. Disadvantages of investing in gold While there are many advantages to investing in gold, there are also disadvantages to investing in gold. There are two main disadvantages to gold investment. ・Affected by exchange rates ・No dividend I will explain the disadvantages of each gold investment in an easy-to-understand manner. affected by exchange rates Gold is an asset that has value in itself, but it is affected by exchange rates. It is particularly susceptible to the US dollar, which is the key currency, and has an inverse correlation with the US dollar. In other words, when the US dollar rises, the gold price tends to fall, and conversely, when the US dollar weakens, the gold price tends to rise. However, please note that the dollar and gold have been strong recently.