The price of gold is affected by various factors – some of them controllable, some of them unforeseeable. Be it central bank policy, supply and demand dynamics or major geopolitical events. In this article, we take a closer look at what factors shape the price of gold and how understanding their interplay can help you make informed investment decisions.
First, one must look at the role of supply and demand. The gold industry is expensive and getting more expensive as gold is mined deeper and deeper into the earth’s crust. At the same time, environmental requirements and the reduction of the ecological footprint of the entire industry must be kept in mind. Inevitably, this also affects the price of the product.
The global gold market is also greatly influenced by the policies of central banks. On the one hand, interest rates affect the price of gold. The more they are raised, the higher the return on debt instruments, which increases the opportunity cost of gold (or a loss of income if you had chosen, for example, government bonds as an investment). On the other hand, gold purchases by central banks and decisions to increase or decrease reserves also affect the gold market. Gold purchases by central banks last year were the largest since 1967.
In addition, other areas also shape the price of gold. These include the demand for jewellery and the use of gold in the industrial sector. The unique properties of gold as a metal make it a necessary raw material, widely used in areas such as electronics, aviation and medicine.
Gold builds confidence
People’s and countries’ sense of security is affected by major events, such as natural disasters, geopolitical tensions, or wars. Of course, they also affect the behaviour of investors. Gold is an asset that has historically been more invested in such events.
Gold has also offered protection in economic and financial crises. The price of gold has done very well during periods of high inflation and also after the last economic crises. Both the crises in 2008 and 2020 were accompanied by a liquidity crisis, which caused the price of gold to temporarily fall. This is due to the fact that financial institutions were short of money and because of this they were forced to sell gold. In both cases, however, it was followed by a rapid price increase, and gold rose to new records 1-2 years after the crisis began.
The price of gold is mainly reflected in dollars. Fluctuations in exchange rates also greatly affect the price of gold. When the dollar depreciates against other currencies, the price of gold generally rises. This means that gold and the dollar index (an index that measures the dollar’s value against six major currencies) are inversely related.
Investors are not psychic
Market psychology and the mood of investors also play a big role in the formation of the price of gold. As an investment, gold competes with other asset classes such as stocks and bonds. During times of faster economic growth, more is invested in riskier assets such as stocks. In worse periods, more safety is sought in gold and also in bonds. Gold and bonds can be considered as each other’s biggest competitors as a safe harbour investment, so to speak. This is why the level of interest rates affects gold so much.
Speculative trading, driven by technical indicators (chart analysis) and short-term events, also influences the price of gold in many ways. In addition to more complex patterns, for example, psychological levels associated with round numbers are considered important in technical analysis, for example, $1900, $2000, etc. Gold has historically been an important part of people’s investment portfolios, helping to hedge risk and provide security.
The price of gold is influenced by a myriad of factors, both controllable and unpredictable, ranging from supply and demand dynamics, central bank policies, and geopolitical events to market psychology. As gold is increasingly mined from deeper layers of the earth, environmental considerations and costs mount, impacting its price. Moreover, central bank actions, like interest rate adjustments and gold reserve changes, have substantial effects on the gold market. The metal’s unique properties also make it indispensable in industries such as electronics, aviation, and medicine.
Historically, gold has been a refuge during economic uncertainties, showing resilience post-financial crises. Exchange rate fluctuations, especially those involving the dollar, further play a role in its valuation. The sentiment and behaviour of investors, driven by various factors including technical indicators, also significantly sway gold’s price. Ultimately, for prudent investment in gold, understanding these influencing elements is pivotal.