What Is Gold?
Gold price – what does it depend on?
Many decades ago, before the emergence of fixed deposits, mutual funds and stock markets, gold used to be the most traditional form of investment. Today, gold is not sought-after only for investment and jewelry making, but to manufacture certain electronic and medical devices.
As of March, 2020, gold has risen to $1,625 per ounce from the previous $1,025 in December, 2019; meaning, the price of gold often go higher when there’s an economic crisis. Remember, the lockdowns of Covid-19 pandemic started in March, 2020 and suddenly, the price surged-up. Analysts view it as an effective tool to diversify a portfolio and a hedge against inflation. Studies show that gold prices have positive price elasticity, meaning the value increases along with the demands. The higher the demand, the higher the price. So, demand, supply and investor behavior are the main drivers of gold prices.
Key factors that the gold price depends on:
Supply and Demand
Supply and demand is the key driver of market price of not only gold but other valued assets. The supply of gold depends largely on its price, as the cost of mining has to be factored-in. So, unlike most other commodities, the supply will likely continue to determine its price than to have a direct impact on gold.
The demand is always consistent as long as, we use it as an effective tool to diversify portfolios. As the price of gold drops, its demand increases in the use of a discretionary spending items like jewelry but the investment demand for gold will sharply decrease as prices of gold drop and verse-versa.
Inflation
Savvy investors start investing in gold when the inflation rates are on the increase as the value of the currency declines. The buying power of this precious commodity has remained strong compared to the weakening paper currency over the last 40 years. So, gold is the perfect hedge against inflation since the fluctuations in the value of the currency does not affect its prices. Inflation will continue to be more reactive to its price as its investment demands increase.
Interest Rates
Interest rates have an inverse relationship with prices of gold. When the interest rates drop, investors don’t get good ROI on their deposits. Rather than keeping their deposits where no good returns are coming in, they intend to buy gold, causing an increase in demand which adversely affect the price.
On the reverse, when the interest rates rise, investors hurriedly sell their gold, to invest in deposits for higher returns thereby causing a drop in the demand and price.
Uncertainty
Uncertainty is one the key influencers of gold prices. Political uncertainty and/or instability is a broad factor that directly affect the prices of gold. The stock market can withstand certainty but not gold. Good examples are the Brexit’s uncertainty for the
U.K. and Europe, who’ll become the 45th president in the U.S. and the terrorist threats in the Middle East have all contributed to the global growth uncertainty and aid in the volatility of the price of gold.
Uncertainty isn’t a quantifiable statistics like other factors but it’s a completely psychological factor that erodes investors’ confidence and it differs from one event to the other.
Wealth Protection
Whenever there’s an economic recession or pandemic, people turn to investing in gold because of its enduring value. Gold is often seen as a “safe haven” for investors during turbulent times. The high demand in investing in gold since bonds, equities, and real estate may have likely fallen, dictates its price.
In conclusion, having adequate knowledge of factors as mentioned above helps one to make a right investment decision and a good projection.