What Determines The Price Of Gold?

Gold is perhaps one of the most consistently valuable metals that we use today. Born of colliding neutron stars, the metal's conception is an incredibly rare and dramatic event. This makes it a scarce commodity in the universe as well as on Earth. 

Gold was discovered by the Egyptians as early as 3,600 BC. Since then, we've been using it as jewelry owing to its inert nature on the skin. Gold quickly grew in popularity and became one of the most sought after commodities in the world. It was perhaps the first metal that was traded across different civilizations as currency. To paraphrase Carl Sagan, “We are all star stuff, and our jewelry is colliding star stuff”. 

If you are looking to invest in this valuable metal, you need to be aware of the various factors that can affect the price of gold. Let’s take a look at them in more detail. 

Factors That Determine Gold Price Today

Considering that gold has been a valuable asset for a long time, there really isn't a straightforward answer to this question. Humanity has been using gold for close to 5,000 years, and to say things have changed over this period is quite the understatement. 

Another factor that further complicates things is that gold has an "indirect" relative value depending on the situation prevailing. People who speak for and against gold have been right and wrong during specific periods in time. But when it comes to a commodity that holds value long-term and consistently, gold is difficult to argue against. 

Here are a few factors that influence the price of gold -

Monetary Policy

Monetary policy controlled by the Federal Reserve is perhaps one of the biggest influencers on live gold prices in the market. Interest rates exert considerable influence on gold prices due to a factor known as "opportunity cost." Opportunity cost is when you give up gains that are guaranteed in one investment because of the possibility of even more significant profits from another investment. 

Low interest rates yield nominal returns and real money losses. In situations like this, gold becomes a great investment option despite its 0% yield, as the opportunity cost for not relying on your interest-based assets is much lower. 

Gold Production

Gold production is another important factor that has a significant bearing on gold prices. China, Australia, Russia, the United States, Canada, and Indonesia are the countries that produce most of the world's gold. While gold production has been increasing worldwide to satisfy demand, gold is a limited resource. Gold that is profitable to be mined is fast depleting, and the prices of gold are only going to increase in the future. 

Global Supply And Demand

Gold is always in demand due to a combination of its rarity, as well as aesthetic, and functional attributes. The electronics and jewelry industries consume a majority of the gold produced in the world. India, China, and the United States are the top consumers of gold jewelry in the world. The demand for gold jewelry in 2018 was 2,200 tons against the production of 3,332 tons - this doesn't leave much room for other industries. 

Also, because it does not corrode easily, it is used in the manufacture of several types of high-precision electronic devices and components including circuit boards, capacitors, and cell phones just to name a few. The investment niche also takes another huge chunk of the gold production. Since there has been no alternative to gold in any of these sectors, it has continued to enjoy high demand. 

Economic Trends

Prevailing trends play a significant role in determining the pricing of gold. There are a lot of factors that make up the economic picture, so to speak. Trade, employment, manufacturing, and GDP are some important variables when considering the economic conditions of a country. 

When a country enjoys a stable economic climate, gold tends to be valued lower. This is because the demand is stronger for other assets that correlate with the economy. When there is financial instability, the market gravitates toward safe-haven investments like gold or cash, which pushes their value higher. While this isn't a hard and fast rule, it is true more often than false. 

Currency Value

It is common for gold prices to be negatively correlated with the value of the currency and, more specifically, the US dollar. What this means is that when the value of the dollar is high, the price of gold stays relatively flat. However, it will become more expensive in other countries where their currency value has fallen. This weakening in demand further pushes down the price of gold in the US. 

On the other hand, when the dollar weakens, falling prices make gold a much more attractive proposition in foreign countries. This increases demand as well as prices for gold in terms of the US dollar. 

Inflation

Inflation tends to devalue assets like cash, stocks, and bonds. Gold moves in a different direction compared to those assets, which makes it a much better proposition for investors. Gold has proven to be a reliable, safe-haven investment in times of political instability or systemic financial risk. As people lose trust in the currency and start buying up gold, its prices start to increase. 

ETFs

While ETFs do not exert considerable influence over gold prices, they do bear mentioning. ETFs buy or sell physical gold in the form of bullion or coins based on demand. The price of gold is affected as the ETFs buy and sell gold depending on the prevailing market. This will have a definite positive spin on the price of gold. 

In Conclusion

Gold is a volatile commodity that is unpredictable at the best of times. Gold has been around since forever and carries with it a considerable perceived value, which makes pinning a number on it difficult. There have been rare occasions when gold has bucked all of these trends. While these instances are few and far in between, they still do happen. 

Gold is an excellent addition to your investment portfolio, along with other assets you already might have. Keeping an eye on these fundamental trends can give you some insight into gold prices, and help you make even better investments in the future. 

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