Factors Affecting Gold Prices

Gold is one of the most important and impactful assets that has been in existence for a very long time. Since the days of barter trade, it has always had a superior presence.

Gold (photo credit: INGIMAGE)
(photo credit: INGIMAGE)

Gold is one of the most important and impactful assets that has been in existence for a very long time. Since the days of barter trade, it has always had a superior presence and attached value, which goes to show just how much worth is attached to it by both countries and business people. Its price, however, is subject to a lot of factors that determine what direction it will go. Discussed below are some of the main factors that influence the demand and therefore, the price of gold:

The U.S. DollarGold is usually priced in U.S currency implying that the value of that currency at any given time will always have a significant impact on how much gold will cost. The stronger the value of the U.S. dollar, the lower the price of gold, whereas the weaker the benefit of the U.S. dollar, the higher the price of gold. 

Central bank rates and policiesThe central bank is charged with the responsibility of formulating and overseeing monetary policy, control supply of money, and determine interest rates, among others. For instance, the French government has continually tied their currency to gold in Francewhich has seen them continue to have vast reserves of gold. The United States has the largest reserves of gold at over eight thousand tonnes. With so much gold in store, it begs the question, ‘why do they keep buying?’ This is mostly due to the fact that the gold has an inverse hedge relationship against the dollar. Therefore, holding physical gold goes a long way in strengthening their currency since the asset is intricately tied to the country's currency. This has seen more states get involved in buying sprees, such as Russia and China. 

InflationHistorically, gold has proved to be a valuable asset that can be used against inflation, a fact that has seen many countries and investors increase their gold acquisition efforts. According to market studies, inflation is one of the leading indicators that is used in predicting the price of gold. Over the last four decades, the purchasing power of gold has remained significantly more substantial than the dollar. 

Commercial and Industrial purposesAbout half of the world’s yearly gold production goes to manufacture of jewelry with countries like China and India being some of the largest consumer markets for such jewelry. The laws of supply and demand also affect gold prices. This happens when the demand for gold-laden jewelry goes up, and the supply is down, the price usually reacts accordingly by going up as well, and vice versa. Gold has good conductivity of both electricity and heat, properties that have increased the areas in which it is being used for industrial purposes. Also, its ability to resist corrosion and colonization by bacteria has proved useful in the medical field. 

ConclusionGold has been and still is one of the most valuable assets that a country or an individual can have in their arsenal as they seek to sustain their economy. Multiple states have realized this, which is why countries such as the French government have rejuvenated their efforts in stocking gold in France to help strengthen their economy.

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