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Fundamental Analysis
Interpret economic data and policies to uncover intrinsic asset value.
Fundamental analysis generally refers to how all market news affects the supply and demand of investment products. The intrinsic value determines the book value of the product price, and the market value will rationally return to the intrinsic value. With countless pieces of market news, which economic factors should investors pay attention to when investing in gold?
In this chapter, we share several key focuses and economic data that the market values, including quantitative easing monetary policy, interest rate changes, and labor department data.
In this chapter, we share several key focuses and economic data that the market values, including quantitative easing monetary policy, interest rate changes, and labor department data.
Quantitative Easing (QE)
Commonly known as “printing money,” QE has been one of the most influential policies affecting gold prices in the past 20 years.
After the 2008 financial crisis and the drag from the COVID-19 pandemic, the global economy fell into recession. To rescue the economy, central banks implemented quantitative easing monetary policies. Through open market operations, central banks increased the money supply in domestic economies. Methods included expanding bond issuance and even directly printing more money, loosening liquidity to solve short-term financing difficulties for nations or companies. This restored capital flow, market confidence, and normal operations, helping to resolve financial crises.
However, this move resembles a Ponzi scheme, as it does not generate real economic growth. The newly printed money drove asset prices higher. During the 2008 financial crisis, gold prices hit record highs near USD 2000. Under COVID-19, global central banks again adopted QE, and gold prices surged past USD 2000. Whenever countries adopt QE, asset prices rise, inflation is stimulated, and asset holders benefit more than cash holders, whose money is eroded by inflation.
After the 2008 financial crisis and the drag from the COVID-19 pandemic, the global economy fell into recession. To rescue the economy, central banks implemented quantitative easing monetary policies. Through open market operations, central banks increased the money supply in domestic economies. Methods included expanding bond issuance and even directly printing more money, loosening liquidity to solve short-term financing difficulties for nations or companies. This restored capital flow, market confidence, and normal operations, helping to resolve financial crises.
However, this move resembles a Ponzi scheme, as it does not generate real economic growth. The newly printed money drove asset prices higher. During the 2008 financial crisis, gold prices hit record highs near USD 2000. Under COVID-19, global central banks again adopted QE, and gold prices surged past USD 2000. Whenever countries adopt QE, asset prices rise, inflation is stimulated, and asset holders benefit more than cash holders, whose money is eroded by inflation.
Interest Rate Changes
There are many types of interest rates, but here we refer to the official central bank rates, especially the U.S. Federal Funds Rate. Interest rates affect corporate financing costs and provide savers with interest income. Rising rates generally cause gold prices to fall, and vice versa.
The Federal Funds Rate is decided by the Federal Reserve through meetings, with some members rotating voting rights each year. Typically, eight regular meetings are held annually, though additional or emergency meetings may occur.
To control inflation, the Fed may raise rates, increasing financing and borrowing costs, cooling market prices. Conversely, during economic contraction, the Fed may cut rates to ease financing pressure and stimulate investment, aiding recovery.
Interest rates and gold prices are inversely related. Lower rates reduce the cost of holding gold, supporting higher prices. Higher rates increase holding costs, reducing demand and pushing gold prices down.
The Federal Funds Rate is decided by the Federal Reserve through meetings, with some members rotating voting rights each year. Typically, eight regular meetings are held annually, though additional or emergency meetings may occur.
To control inflation, the Fed may raise rates, increasing financing and borrowing costs, cooling market prices. Conversely, during economic contraction, the Fed may cut rates to ease financing pressure and stimulate investment, aiding recovery.
Interest rates and gold prices are inversely related. Lower rates reduce the cost of holding gold, supporting higher prices. Higher rates increase holding costs, reducing demand and pushing gold prices down.
Labor Department Data
The labor market best reflects the outlook of an economy, and globally, the U.S. leads the way. Thus, markets pay close attention to U.S. Non-Farm Payrolls (NFP). This data influences global financial markets and investment products.
For example, if results deviate significantly from expectations, U.S. stock indices may move by more than 3%, or gold prices may swing by over USD 20. The data is released by the Department of Labor on the first Friday of each month, and global investors closely watch it.
The figures represent net job growth. Positive growth indicates optimism, with companies hiring more staff, reducing safe-haven demand and pressuring gold prices. Negative growth shows job cuts, raising risk aversion and boosting gold prices. Thus, job growth and gold prices are inversely related. This monthly data is crucial for gold investors to monitor.
For example, if results deviate significantly from expectations, U.S. stock indices may move by more than 3%, or gold prices may swing by over USD 20. The data is released by the Department of Labor on the first Friday of each month, and global investors closely watch it.
The figures represent net job growth. Positive growth indicates optimism, with companies hiring more staff, reducing safe-haven demand and pressuring gold prices. Negative growth shows job cuts, raising risk aversion and boosting gold prices. Thus, job growth and gold prices are inversely related. This monthly data is crucial for gold investors to monitor.
Other Economic Data
Retail Sales
Measures the monthly change in overall national sales
Published mid-month by the U.S. Department of Commerce at 08:30 AM
Gross Domestic Product (GDP)
Measures the growth of total national income
Released as preliminary and revised data by the U.S. Department of Commerce at 08:30 AM
Producer Price Index (PPI)
Measures price changes in goods produced by factories, farms, etc.
Published mid-month by the U.S. Department of Commerce at 08:30 AM
Consumer Price Index (CPI)
Measures market prices
Published mid-month by the U.S. Department of Commerce at 08:30 AM
Weekly Initial Jobless Claims
Measures the number of people filing for unemployment benefits for the first time in the previous week
Published every Thursday by the U.S. Department of Labor at 08:30 AM
Durable Goods Orders
Measures changes in the total value of orders placed with durable goods manufacturers
Published before the end of the month by the U.S. Department of Commerce at 08:30 AM
Purchasing Managers’ Index (PMI)
Covers manufacturing and non-manufacturing sectors. A reading above 50 indicates growth, below 50 indicates contraction
Published on the first working day of each month by the U.S. Department of Commerce at 10:00 AM
New Home Sales
Measures the pace of new home sales
Published at the end of each month or early the following month by the U.S. Department of Commerce at 10:00 AM
