Gold is one the most popular commodity among most investors since it is known to retain its value even in times of financial crisis. It is also perceived as a symbol of wealth and status globally.
However, the prices of gold may vary depending on various factors like demand and supply, government reserves, import duty, inflation, currency fluctuations among others.
Note that, the metal is dollar-denominated meaning it is inversely related to the value of the United States dollar. so, if you are thinking of investing in gold, here is what you should know. You can also check out recession gold price for more guidance.
- Supply and demand
The law of supply and demand dictates that an increase in demand may lead to low supply and the prices may go up.
On the contrary, if the supply increases and the demand stagnate the prices tend to go down. According to research, the demand for gold currently is higher than the current supply. This explains why the prices of gold have gone high in the past years.
Besides being a valuable asset, gold has multiple uses including the manufacture of life-support devices, ornaments, electric wires, and more. This increased demand has led to a surge in the yellow metal price.
Although ETFs are designed to improve the flow of liquidity and to spread risks, they still play a minimal role as influencers. Gold ETF companies purchase and sell physical bullion to investors on a stock exchange.
A change in demand by investors can impact the buying and selling process of ETFs, therefore, affecting the overall price of the metal. A surge in the cashflows for ETFs may have a positive impact on the prices of gold.
- Monetary policy/Fed speak
The federal reserve plays a huge role in the prices of gold since they control the monetary policy. Once every six weeks, the committee holds meetings to discuss the future of monetary policy and the economic state of the country.
If the committee predicts a future increase in the interest rates, the prices of gold tend to go down. Since interest rates are linked to opportunity cost, most investors tend to forego interest-bearing assets at this point.
On the other hand, if the committee predicts the rates will remain steady in the near future, the prices tend to shoot. This means the opportunity cost of forgoing interest-based assets remains low. Read here for more https://www.tomorrowmakers.com/gold/factors-affect-gold-prices-india-topical-article
Inflation is linked to a rise or fall in the prices of commodities. In times of high inflation, the prices of these yellow metals tend to go higher, whereas deflation tends to weigh on gold.
This is probably the reason why gold is used as a hedge against inflation. When a country’s economy is doing well, the monetary supply tends to expand. This reduces the value of the monetary note, making it more expensive to purchase valuable items like gold.
- Economic data
Another big influencer of gold prices is the economic data. These include manufacturing data, wage data, job reports, and broader-based data like GDP growth which impact the decisions of the Federal Reserve’s monetary policy.
Well, this isn’t completely mandatory, but the prices of gold are most likely to go lower if the economy faces high jobs growth, manufacturing expansion, and low unemployment rates.
The feds are most likely to tighten the monetary policy when the economic growth is high thus affecting the opportunity cost dynamic mentioned above.
- Currency movements
As mentioned, the price of these precious metals is dollar-denominated. This makes the U.S dollar a robust influencer.
A drop in the value of the dollar leads to an increase in the value of other currencies across the world. This pushes gold prices higher.
Conversely, the prices of the metal tend to weaken with an increase in the value of the dollar. Typically, the relationship between the U.S dollar and gold is inversely proportional.
- Geopolitical factors
The metal actually does well in times of geopolitical turmoil unlike other assets like stocks bonds or real estate. This is why gold is thought to be a safe haven by most investors.
Well, it’s hard to tell which uncertainty can move gold but political instability is probably a good example. Not knowing how a change in the government will impact a country’s economic growth or how to deal with terrorism and its adverse effect can contribute to global growth uncertainty. This may or may not impact the change in gold prices.
- Import duty
Countries that import this precious metal are most likely to incur certain charges as import duty. These charges have a huge impact on the prices of the metal.
- Correlation with other assets
Gold plays an integral part in portfolio diversification since it has a positive correlation with all the other classes of a major asset. When the stock market falls, the price of gold remains unchanged. Gold has an inverse relationship between it and other equities. Click here to learn more.
There are so many things that could impact the prices of gold, one of them being demand and supply. Culture, desire for beauty, financial protection, and traditions are some of the things that impact the current high demand. In countries like India for instance, metal plays an integral role in every festival. A wedding cannot be complete without them gifting each other gold jewelry. During this season the demand is high and so are the prices. This clearly shows that gold is one of the most valuable commodities in the world.