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What drives the price of gold?

by SuperiorInvest

Today, gold is sought after not only for investment purposes and jewelry making, but also for use in the production of some electronic and medical devices. Gold (as of January 2023) was more than $1,870 an ounce, and while down about $100 from the peak posted in April 2022, it is still well above the sub-$100 levels seen 50 years ago.

What factors affect the price of this precious metal higher over time?

Key things

  • Investors have long been fascinated by gold, and the price of the metal has risen substantially over the past 50 years.
  • Like most commodities, supply and demand are incredibly important, but gold also retains added value.
  • One important source of demand for the metal is government vaults and central banks.
  • Investment demand, particularly from large exchange-traded funds (ETFs), is another factor behind the price of gold.
  • Gold sometimes moves against the US dollar because the metal is denominated in dollars, making it a hedge against inflation.
  • Gold supplies are mainly driven by mining production.

Ellen Lindner / Investopedia


How gold prices are determined

Reserves of the central bank

Central banks hold paper currency and gold in reserve. How central banks diversify their currency reserves— away from paper currency which they have accumulated and into gold— the price of gold usually rises. Many nations of the world have reserves which consist mainly of gold.

Bloomberg reported that global central banks are buying the most gold since the United States gave up Gold standard in 1971, with the 2019 figures falling only slightly from 2018’s 50-year record. After a decline in central bank gold purchases in 2020, the pace picked up again in 2021 and again broke the 50-year record in 2022. The biggest buyer of gold in 2022 was the Central Bank of Türkiye, followed by Uzbekistan, India and Qatar.

The value of the US dollar

The price of gold is generally inversely proportional to the value of gold American dollar because the metal is denominated in dollars. All else being equal, a stronger US dollar tends to keep the price of gold lower and more controlled, while a weaker US dollar likely to drive the price of gold higher through increased demand (since more gold can be bought when the dollar is weaker).

As a result, gold is often seen as a Hedge against inflation. Inflation is when prices rise, and likewise, prices rise when the value of the dollar falls. As inflation rises, as does the price of gold.

The impact of inflation and the value of the dollar can be seen in recent gold price action. As inflation rose in 2022, the price of gold actually fell for most of the year, partly due to the dollar’s strength against other world currencies. After hitting lows of just under $1,630 an ounce in September and October 2022, the price of gold has begun to recover, with lingering inflation and recession fears boosting prices during the fourth quarter. quarter boy and until 2023.

Global demand for jewelry and industry

In the first half of 2022, jewelry accounted for approximately 44% of gold demand World Gold Council. India, China and the United States are major consumers of gold for jewelery in terms of volume. Another 7.5% of demand is attributed to technology and industrial uses of gold, where the metal is used in the production of medical devices such as stents and precision electronics such as GPS units.

Therefore, gold prices can be influenced by fundamental theory supply and demand; as a demand consumer goods jewelry and electronics increases, the price of gold may rise.

Protection of wealth

In times of economic uncertainty, as seen in economic times recessionmore people are investing in gold because of its lasting value. Gold is often considered a a safe haven for investors in turbulent times. When expected or actual returns on bonds, stocksand property decline, interest in investing in gold may increase, thereby increasing its price. Gold can be used as collateral to protect against economic events such as currency devaluation or inflation. In addition, gold is considered to provide protection during periods of political instability.

Investment demand

Gold is also seeing demand from exchange traded funds (ETFs) which hold the metal and issue shares that investors can buy and sell. The SPDR Gold Trust (GLD) is the largest, holding more than 915 tonnes of gold as of January 2023.

Gold production

Major players in global gold mining include China, South Africa, the United States, Australia, Russia and Peru. World gold production affects the price of gold, another example of how supply meets demand. The gold mine’s production was around 3,000 metric tons per year in 2020 and 2021, down from a peak of around 3,300 metric tons per year in 2018 and 2019.

Despite an increase starting around 2010, gold mining production has not changed significantly since 2016. One reason is that the “easy gold” has already been mined; miners now have to dig deeper to get to quality gold reserves. The fact that gold is more difficult to obtain raises additional problems: Miners are exposed to additional hazards and the impact on the environment is increased. In short, it costs more to get less gold. These increase the cost of producing a gold mine, which sometimes leads to higher gold prices.

What makes gold so valuable?

The value of gold is rooted in the history of human civilization, as the metal has remained a symbol of wealth for thousands of years. The value of gold ultimately comes from a social construct based on the agreement that gold has been valuable in the past and will remain valuable in the future. In addition, gold’s appeal revolves around its ability to retain value over time and its use in jewelry and technology products.

What causes gold prices to fluctuate?

Although the metal has proven its ability to maintain its value over time, the price of gold is often unstable in the short term. There are many factors that affect the price of a metal. Because gold is generally denominated in dollars, a stronger US dollar tends to lower gold prices and vice versa. The actual and expected rate of inflation also affects the price of the metal. Gold purchases by central banks have an impact on the price, as does demand for gold for use in jewelry and technology devices.

Should I invest in gold?

Gold adds an important layer diversification into the investment portfolio as it has shown a negative historical correlation with other asset classes. In other words, when investments like stocks and bonds falter, gold tends to overcome. Investment exposure to gold is useful to hedge against inflation and increase your security portfolios in tough economic times.

Bottom Line

We have long been, and probably will continue to be, enchanted by gold. Today, the demand for gold, the amount of gold in central bank reserves, the value of the US dollar and the desire to hold gold as a hedge against inflation and currency devaluation all help drive the price of the precious metal.

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