The price of gold is considered as a major indicator of the status of global economy.gold prices depend on demand and supply in the gold market which is dominated by future market and speculation. Central banks can be the biggest player both as a seller and buyer. Gold prices increased because people ran to gold to help them hold on to the value of their savings.
There are 6 main factors that affect the price of gold.
1. Value of US dollar
The foremost factor that governs the price of gold is the value of US Dollar. A stronger US dollar will keep the price of gold controlled and low. A weak dollar will set the price of gold spiralling to a very high price. US economy plays a major role in shaping the macroeconomics of the world. When the dollar is strong, people invest, buy and trade in dollars.
However, in recent times, the US economy has suffered a lot. Dollar has not remained as powerful and promising as ever; this is the reason why people and nations start investing and hoarding in bullion. The high gold reserves strengthen the national economies and act as a hedge against inflation.
2. Production of gold
Due to the rising cost of production in gold mining, strikes by gold-miners, worsening political situation, the sharp increase in the oil prices after the Iraq war, and terrorist attacks, a decline in the gold-mining production has been recorded for the past 5 years. The world population is constantly rising, and so is the demand of investment in bullion. Man has always believed in investing in bullion since ages. So, the prices of gold are also affected by the natural desire of man to hoard gold.
3. Demand for jewellery by the China and India markets
China and India are the biggest buyers of bullion for their jewellery market. In the year 2004, Chinese citizens were granted the ownership of ignot for the first time in history. This triggered a very high demand of bullion, which subsequently affected the price of bullion worldwide. In 2009, a record 32% decrease in the demand for gold-jewellery was recorded, due to the global economic crisis, which resulted in a slight decline in the gold-price.
4. Central Banks
Central banks and mining companies, with a large amount of gold reserve, can and do affect the gold price. By massively selling or buying gold (or reducing the output, in case of mines), these market players can change the gold rate.
But the power of central banks should not be overestimated. First, they hold only 16% of the produced gold. Additionally, the Washington Agreement on Gold (WAG) from 1999 puts a cap on the sales of gold by its members (United States, Japan, Europe, Australia, Bank of International Settlements and the International Monetary Fund). This agreement limits the sale to less than 500 tonnes annually.
Besides huge gold stocks, central banks have another way of directing the gold rate. If central banks increase the interest rate, they make gold investments less favourable, as gold does not produce interests. Therefore, investors would realign their portfolio in favour of national currencies or bonds.
5. Speculation and Investing
Surely, gold is not only bought and sold to govern national economies, but investors also appreciate gold. It can be used as a hedge against inflation (inflation reduces the value of currencies). The gold price is negatively correlated with the US dollar. If the dollar becomes weaker, gold will become more valuable. Speculators can also choose futures and options to even benefit from falling gold rates, and to profit disproportionally from gold price movements.
6. Supply and Demand
This is true of any commodity. If the demand for gold increases (particularly in the Asian markets of India & China) suddenly and the supply cannot meet the demand, the prices will increase. Similarly, if production of gold is hit because of a miners' strike and the supply falls, this will also lead to an increase in prices.Although there are many hidden factors that are said to influence price of gold, broadly speaking, there are only a few factors that certainly do. The remaining factors are generally speculative and not mutually agreed upon.
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