An Investor’s Guide To The 4 Factors Affecting Gold Prices

We’ve been taught the importance of gold from the stories of pirates, princesses, & leprechauns that we’ve heard since we were children. We’ve been familiar with its distinctive yellow hue as well as its perceived value as a sought-after item. This makes gold a well-known asset or commodity around the planet.

It’s important to understand that the gold price is determined by a number of market forces, many of which are in direct opposition to one another. Here’s what you need to know before you start prospecting for gold.

What Causes Gold Prices To Fluctuate?

Gold’s price changes are the result of numerous interrelated causes, instead of a single driving force. In general, there are several factors that influence gold’s price:

1. Demands

There are numerous uses for gold, which is why it is so sought after. In addition to its usage as a valuable metal, gold is widely utilised in the manufacturing industry as a conductor of electricity and a component in life-sustaining systems.

Investing in gold is also a viable option. There are a variety of ways to invest in gold. Some investors choose to hold physical gold in the form of bullion, coins, or jewellery; others prefer to acquire “paper” gold, such as Gold ETFs, gold-focused unit trusts, or even gold miners.

As a general rule, an increase in demand for gold leads to an increase in gold’s price. Economic expansion in China and India over the last decade has fueled gold demand and raised prices. In recent years, as their economic growth has stabilised, this need has softened.

2. The Relationship Between Gold And Fiat Currency Is Inverse.

When the value of a country’s currency was fixed to the gold price, many countries adopted the gold standard. The value of one US dollar, for example, is 1/1000th like an ounce of gold worth US$1,000.

It’s no longer true that this is the case.  Most countries now use fiat currencies, in which the currency value is determined by factors such as the amount of money in circulation or the level of confidence in the government’s ability to repay its loans. Governments are free to expand and decrease monetary supply based on their economic goals rather than how much gold they can keep in their vaults, however this carries an additional level of risk.

Because of this, it’s not uncommon for a country’s currency to depreciate along with public confidence in the government and economy. Many people turn to gold in order to protect their wealth against currency devaluation in these situations.

Gold prices will fall as a result of a rise in the value of the US dollar against foreign currencies. Gold’s demand would fall if investors outside the United States had to factor in the higher cost of buying the metal in their home countries’ currencies, and vice versa.

As a result, gold has an inverse connection to the US dollar. Gold prices to fall when the US currency strengthens. This is why a large number of gold investors maintain tabs on the u.s dollar and also the exchange rate

While gold and US dollar have been increasing in unison for five years, this is unusual. Several macroeconomic reasons, like rising global debt levels and indeed the impact of the China-US trade war, have contributed to the rise in gold prices this year.

3. Gold’s Value Like A Haven Asset Is Well Established

Gold, which has been dubbed the “safe haven asset” by Wall Street, can hold its value in actual fact even in times of economic uncertainty and is a buffer against growing living expenses. As a hedge against financial instability, central banks maintain their own gold holdings.

More than 20% of central banks surveyed in the 2020 Central Bank Gold Holdings Survey plan to expand their gold reserves by 12 months, citing the precious metal’s “performance during crises” as one of the main reasons.

With the COVID-19 epidemic and its successive waves causing economic uncertainty, the price of gold increases as a safe haven asset. Increased demand from investors causes the price of gold to rise during volatile periods, since they are better able to protect their portfolios than equities or bonds.

As a result, gold prices surged throughout 2020, reaching an all-time high of US$2,000 per ounce in New York trading in August, the first time it had ever done so. Similarly, in early November, word of a coronavirus vaccine led to a drop in gold prices, although the price remained below US$1,900 per ounce.

4. Supply Of Gold On The Market.

Almost 198,000,000 kg of gold have been extracted during the course of human history. All gold mined would fit into one cube that is 21 metres long and deep if we’re to gather it all together!

Every year, gold mining adds between 2,500,000 and 3,00,000 kg to the world’s total supply of gold. In most cases, this amount is not enough to satisfy worldwide demand. Miners’ discovering less gold than predicted can cause gold prices to rise even higher if supplies are lower than projected.

In terms of gold reserves, it is now estimated that just around 20% of the world’s gold remains to be extracted. Miners may soon be able to recover gold from previously unreachable locations, thanks to advancements in technology.

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