Gold has been the cornerstone of the global financial system for thousands of years. Not only in ancient times but even today, gold serves as a symbol of wealth. Hence, if you are looking to invest in gold or want to learn the xauusd price, you must understand what drives the prices of gold.
Generally, the price of gold depends on the reserve of the central bank and their trends of purchase. Apart from that, it is also a result of economic and political instability, global gold production, mining challenges, supply and demand, etc.
So, to learn the factors that influence the price of gold assets, read on.
Gold As an Asset for Investors
There are certain characteristics of gold that set it apart from all other forms of investment options. Basically, gold is a lustrous and indestructible metal that has a limited supply. Hence, it is a stable and has long-term value.
In fact, the scarcity and permanent nature of gold makes it a hedge during inflation or currency devaluation. Hence, gold helps during economic instability. On the other hand, gold is tangible and has high liquidity across the world. Moreover, it has value in every country no matter its political and economic situation.
Generally, the value of gold rises when there is a decline in people’s confidence in other financial assets. For instance, during inflation, geopolitical instability, and economic uncertainty, the price of gold increases.
Hence, if you are an investor, you must diversify your investment by investing in gold.
Major Factors That Affect Gold Prices
There are a variety of factors that contribute to the price changes of gold. Hence, to learn the main causes that affect gold prices, read the following points:
1. Demand for Gold
Gold as a commodity has multiple uses and applications. Not only is gold a precious metal, it is also used a lot in the manufacturing sector. For instance, many businesses use it as an electricity conductor and use it as an important item in life-support devices.
On the other hand, investors and traders trade in gold. For instance, an investor can own physical gold (gold bullion, gold coins, and jewelry) or “paper” gold like gold ETFs and mutual funds. The latter is less pricey and convenient. Apart from that, many investors invest in gold currency or even gold miners.
Hence, when there is a high demand for gold, it will surely have a higher price. Also, a higher economic growth leads to a higher demand for gold and hence the prices increase. Here, the demand softens as the economic growth stabilizes.
2. Connection with Fiat Currencies
In early days, countries like the United States adopted the gold standard for the USD. Here, the Federal Reserve pegged the value of the currency to the price of gold. For instance, if the price of an ounce of gold is $1000, then the value of one US dollar will be 1/1000th of that ounce of gold.
However, this is not followed anymore. Now, most central banks use fiat currencies. Here, the value of these currencies depends on factors like monetary supply, and people’s trust in the government to repay its loans.
Although this has some risks, it still offers freedom to governments to increase/decrease the supply of money on the basis of economic goals. Now, the value of currency does not depend upon how much gold the government is holding in its treasury.
On the contrary, it also means that when people stop trusting the government or if the country’s economy fails, the value of the currency falls as a result. This is where investors look to gold. Hence, their wealth does not erode despite the devaluation of currency.
On the other hand, if the value of the fiat currency increases, it depreciates gold prices. This is because investors start looking at the price of the gold with their local currency. Hence, gold prices depreciate due to a lack of demand.
In general, the price of gold has an inverse relationship with the US dollar. For instance, if the strength of the US dollar increases, gold prices will experience a dip.
3. Gold as a Stable Asset
Gold is the safe haven asset of Wall Street. This is because gold can store its value in real terms despite volatility in economic conditions. As a result, it provides a hedge against price rises during inflation. Hence, to save their financial situation, Central Banks like the Federal Reserve keep gold reserves.
Most central banks are of the opinion that they hold gold because it is a precious metal which can perform at times of crises. Hence, they take continuous steps to increase their gold reserves with time.
Generally, the price of gold fluctuates upward during crises and volatility. This happens when investors show a higher demand.
4. Limited Supply of Gold
Not just for gold, the law of supply and demand works for all commodities and helps in driving gold prices. Despite that, gold is a unique form of investment. This is because it has a limited supply when you compare it with all existing stocks.
Hence, the price of gold becomes sensitive to demand fluctuations. Also, market sentiment and demand have a major impact on the price of gold, rather than the level of production.
Summing Up
Multiple factors impact the price of gold. Hence, do not be too quick to invest in gold. Just buying more gold during bad times will not work. Basically, you need to determine the amount of gold that is right for you. Also, you must decide the time up to which you shall be holding to the gold.
Moreover, when you are investing in gold, evaluate different forms of investments to determine the types of risks. Furthermore, make sure you are buying from trustworthy and authorized sources. However, if you do not want to spend a lot beforehand, consider investing in gold ETFs and mutual funds.
Do you have more information to add regarding impact factors on gold prices? Please share your ideas and opinions in the comments section below.