When people think of gold, they often associate it with wealth, power and success. This is why it is one of the most valued metals on Earth. From an investment standpoint, gold is also considered one of the safest investments, as even if the price of gold fluctuates, its value remains relatively stable. So what influences the price of gold? Let’s take a look at some of the main factors:
US Dollar – The price of gold is most often quoted in U.S. dollars; this is why the value of the US dollar has a big impact on the price of gold. Confidence in the U.S. dollar plays a big role on the value of gold. When the US dollar strengthens, the price of gold tends to go down. When the US dollar is weak, investors tend to buy gold, and when demand for gold is up, its value rises.
Inflation –The price of gold can vary with market conditions. Currency values fluctuate, but the value of gold stays more stable in the long run. Investors are attracted to gold because they see it as a low-risk, stable investment in the midst of fluctuating currencies. Investors are more determined to buy gold if they think the value of their paper money will decline.
Debt – The world is awash in debt. Sovereign debt, corporate debt, and personal debt. The effect of this, especially since the financial crisis of 2008/2009, has been historically low interest rates and lose money policies. Gold is the currency that people turn to in such environments.
Negative Real Interest Rates – These factors add up to negative real interest rates. Simply, an economic environment in which the inflation rate exceeds the interest rate. This is inevitable with current monetary policies and budget deficits. Watch for this to have a positive effect on the gold sector.
Worldwide Demand – As with any commodity, gold is influenced by supply and demand. Gold is a finite resource that is difficult to mine. If there is a limited supply on a worldwide scale, and central banks and investors want more, basic economics determines that the price of it will increase and vice versa.
If you are planning to invest in gold, you need to understand that the demand and price of gold can increase due to several different factors, and the above are just a few of the factors that affect gold prices.