Prices of gold have magnified significantly throughout the years, with industrial demand and production being among the factors influencing the price of the world’s most popular precious commodity. However, as with any commodity, speculating its price is not an easy process. So it is important to know the main factors that drive the price of the world’s favorite precious metal.
Industrial Demand. Gold is an extremely valued and desired commodity. Apart from being a precious metal, approximately half of the world’s demand for gold is used for jewelry. Another large percentage of the demand for gold is used for technological and industrial purposes.
Therefore, the price of gold can be driven by the simple theory of supply and demand. As the cost of the desired commodity can increase as the demand for consumer items such as jewelry and electronics rises.
Gold as a “safe haven”. During harsh times of economic recession and uncertainty, many investors invest in gold due to its everlasting value. The precious metal is usually regarded as a “safe haven” for investors during uncertain times. When the price of bonds, equities, and real estate drops, the interest in gold investing can rise, fueling its price. Gold can be used as a valuable asset to reduce risk against economic events such as inflation or currency devaluation. Additionally, gold is also regarded as a provider of protection during times of political instability.
Production. Mining gold is an expensive procedure due to gold being a rare commodity and therefore precious. Since 2012, there haven’t been any significant discoveries on new gold deposits, therefore minors now have to dig deeper to find more quality gold reserves. This more challenging endeavor causes more issues: miners being exposed to more hazards as well as the environmental impact deepening. In other words, it is more costly to extract less gold. These factors increase the costs of mine production, which can result in higher gold prices.
Central Banks. Central banks lean towards keeping paper currencies and gold in monetary reserves. Monetary reserves are the holdings of banknotes and other reserved valuables such as gold which are held by monetary authorities such as central banks that are available mainly to balance payments of the country.
As for the price of gold, it usually rises when central banks diversify their monetary reserves away from the paper currencies they’ve accumulated and into gold. Many nations from around the world hold reserves such as these that mainly consist of gold.
The value of the US Dollar. Since gold is a dollar-entitled precious metal, its cost per ounce is immediately influenced by the value of the United States dollar. So, a stronger US dollar tends to keep the price of gold lower, and vice versa-when the value of the US dollar drops it's likely to cause the price of gold to increase.
Investors prefer to wait until the dollar is weaker before purchasing gold, this is due to investors wanting more gold for their buck. As the demand for the valued commodity rises, so does its price.
Inflation. Inflation or the increasing price of goods and services is another factor that can influence the price of gold. Rising levels of inflation tend to drive the prices of gold higher, on the other hand, decreasing levels of inflation cause the prices of gold to drop.
Inflation is mostly a sign of economic prosperity. When the economy is thriving, it’s customary for the Federal Reserve to expand the supply of funds. Expanding the supply of funds weakens the value of each existing banknote in circulation, making it more costly to acquire assets that are considered valuable, such as gold.
ETFs. ETFs have become a very popular and valuable investment vehicle, where investors can buy and sell assets such as gold through a brokerage firm on the stock exchange. Within ETFs, gold is a favored commodity where it is bought and sold just like shares. As of now, ETFs signify a valuable share of total gold demand per volume, which has a major impact on its per-ounce cost.
By being aware of these factors, speculations can be made regarding the direction the precious metal will be going in the future. This helps investors make better-informed decisions regarding the best time to buy and sell the precious commodity.
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