A Guide to the 5 Factors That Affect the Price of Gold
A symbol of wealth and stability, gold is one of the most highly sought-after precious metals in the world. It is prized for its ability to retain value when other markets fall.
This, however, does not mean that gold is free from volatility—in reality, gold prices fluctuate based on supply, demand, and economic conditions. Read on to learn more about the value of gold and the factors affecting it.
The Value of Gold
Like all other goods and services, the price of gold is affected by changes in supply and demand.
1. Supply
Gold’s supply doesn’t work like other commodities. Unlike oil, for example, gold is rarely used up—almost all the gold that has ever been mined is still in circulation. In theory, this should mean that prices drop over time.
However, this has not been the case, partly because there is a finite supply of gold, and all the metal that is “easy” to mine has already been mined. Moreover, much of the world’s gold is not being used. Hence, while more gold may be in circulation, it is unavailable for purchase.
2. Demand
Many products, from dentistry equipment to smartphones, rely on gold’s unique properties. Additionally, gold jewelry represents a large source of annual demand for gold per sector, and demand for gold continues to grow over time.
3. Central Banks and Reserves
It is risky for central banks and reserves to hold onto huge amounts of currency: if the currency drops in value, the reserves also fall in value. As such, banks and reserves must diversify from paper currencies to gold, which retains its value even during economic uncertainty. During this process of diversification, the demand for gold increases, leading to increased prices.
The opposite occurs when the economy is booming. While gold can retain its value well, it does not generate a return; it does not secure you an interest. Therefore, a robust economy often results in central banks selling some of their gold, causing prices to fall.
4. Value of US Dollar
Gold prices are denominated in US dollars.
When the US dollar falls in value, one can buy more gold with the same amount of money. This increases demand, leading to an increase in gold prices. Conversely, gold becomes more expensive when the US dollar gains strength. Thus, demand falls, and prices are pushed down.
For this reason, gold is often considered a hedge against inflation.
5. Economic Certainty/Uncertainty
The state of the economy affects investor demand for gold, thus affecting its prices.
Conflicts often disrupt global supply chains and trust in financial instruments, causing investors to flock to gold as a safe haven. This was evident in the surge of gold demand after the US announced the Russian oil import ban. Hence, uncertainty and instability tend to raise gold prices.
When things are going well, investors feel secure and keen to pursue more speculative investments that may yield more returns. This causes gold demand and prices to fall.
Conclusion
If you’re planning to buy or sell gold, you must understand the factors affecting its value. This will help you navigate the gold trading and investment market more effectively and safely.
Are you looking to sell diamond, gold, or jewelry? Check us out at Jumbo Gold and Diamonds, one of Singapore’s leading gold and diamond traders. We buy and sell gold and diamond jewelry, silver and gold bullion, and more. Reach out to us for more information.