Physical gold demands, weak us economy, and geopolitical tensions are 3 catalysts that drive gold price rise recently.

Since the beginning of this month, gold prices continue to rise, triggered by geopolitical tensions all over the world, particularly in Iraq. However, since then, there are mixed signal on the market, with XAUUSD stays on the high level, but gold futures gave an indication of failing.

Gold prices nowadays generally driven by three fundamentals:

 

1. Physical Gold Demands from China and India

Two countries that occupy the honored place of gold biggest consumers are China and Indial. Their demands for gold grows from year to year, as could be seen in the following graph. During 2013 alone, each country purchased 1066 and 975 metric tons respectively.

GoldInternational Gold Trade Data

According to the Law of Demand, the lower the price of a commodity, then the quantity of the commodity's demand will rise. Chinese were taking advantage of the fall of gold price in the middle of 2013 due to their function as long-term store of wealth. However, because the rising demand is partly due to the low gold price at the time, when gold price increases, demands for gold lessened.

On the other hand, lessening gold demand shall limit gold price recovery. But the Law of Supply and Demand could only be applied with the assumption of ceteris paribus (other things remain constant). The emergence of another two fundamentals underlay the ongoing gold price increases.

It needs to be noted that although physical gold demand has low to moderate influence toward overall gold price, but the impact will stay for a long time, be it in physical gold or in commodity market.

 

2. Weak US Economy Recovery

The US economy recovery has been hit with several weak data in the past weeks. The last hit came from GDP 2014 Q1 report that records lowest growth at just 2.9%. Such poor economic performances push gold prices higher. Why?

Gold has been known as an anti-inflation and anti-crisis asset. No matter what happen with the world now, gold prices in the long term most assuredly will go up. That is what it means for gold as one of few safe haven asset. Consequently, when financial investment promised bad risk/reward proportion, investors move to gold.

The problem is, such interest is easily changed. Last week they seek gold and drive its price upward, but this week they could do mass-selling. Therefore, price changes due to speculative actions commonly not permanent and do not directly influence physical gold price such as bullions, coins, and jewelries.

 

3. Rising Geopolitical Tensions

Many analyst only mentioned upheavals in Iraq as the driving force behind rising gold price. But actually, tensions has abounded all over the world; from Iraq to Ukraine to South China Sea and East Asia, people are walking on edge these days. There are always possibility that something big will explode in the near future, and that is why some traders think that gold price, including XAUUSD and gold futures, is in the beginning of a bullish trend.

But actually, rising prices due to geopolitical tensions could not be relied upon to drive prices further. Gold prices this week is predicted to end higher, but in the next week, it could lose more than it has gained this week. Starting from tomorrow, Muslims worldwide will observe holy month of Ramadhan. It is possible that fights in Iraq is going to cease temporarily, thus create an illusion of peace where gold prices calmed. The conclusion is, fundamentals for gold prices for the following month is still in neutral territory.

What do you think about gold prospect? Do you have another opinion? From technical standpoint, maybe? Let us talk about it.