Understanding the factors that influence the price of gold is crucial before making an investment in the precious metal. Just as important is being aware of the key differences in the supply and demand for gold compared to other investments like commodities, stocks, and bonds.
Another factor to take into account; Gold is not the only precious metal to consider when making this type of investment. Silver, platinum and palladium are also highly sought after as investment vehicles, they offer similar fundamentals to gold, but each have their own unique characteristics as an investment.
Factors Influencing the Price of Gold Bullion
The value of a gold coin or gold bar is found in its precious metal content. While gold is pretty to look at in almost any form, when looking for investment purposes, its aesthetic appeal is often not a consideration. Because of this, the value of gold bars is directly tied to the market price of gold and will fluctuate as the market moves, just like stocks, bonds, and commodities.
How to measure the price of gold
When quoting the price of gold, most trade reports will show the price per troy ounce in US dollars. If you are following the market from outside the US, be sure to convert this price to your local currency and know that one troy ounce equals approximately 31.1 grams.
Also note that the price quoted in the market is always for pure gold. Most jewelry is much less than pure (usually 40-75%), however bullion and coins often have fairly high purities (above 90%).
With an understanding of the mechanics behind the price of a physical sample of gold, you can begin to look at the market forces that cause the wide daily swings in price. They are listed in order of their impact on the daily gold price.
1. Macroeconomic data
By far the most influential metric on the price of gold is the daily economic data coming out of the world markets. Historically, gold has always been a “safe haven” type of investment. Like real estate and cash, it’s a place to put your money if things aren’t looking good elsewhere. When money is withdrawn from the stock market, it usually flows into these types of investments, but in 2008, when the stock market and the real estate market experienced simultaneous declines, gold seemed the only safe option and, in turn, began its dramatic gains. in the price.
2. Inflation pressure
Inflation is the theory that, over time, the value of money will always fall as prices rise. While the average home price isn’t $40,000 like it was in 1975, the amount of gold bullion it would take to buy the same home is pretty consistent: $40,000 worth of gold in 1975 would be worth a little more than $310,000 today.
This means that no matter what the market is for gold, in the long run it is always better than holding cash without earning any interest. Although gold does not pay interest, its price generally follows the rate of inflation or better.
3. Gold Supply and Demand
Supply and demand is the main driver of market prices behind most commodities. While the price of gold is much more complex than this basic formula, these factors come into play.
The supply of gold is highly dependent on its price, as the cost of extraction has become very high. It used to be fairly easy to pan for and mine gold, with many gold rush stories of reaching the mother lode. Today, it is much more difficult to mine gold in large quantities and requires expensive equipment and technology. Also, since gold doesn’t actually “run out” or get consumed the way other commodities do, there is always a large reserve of gold, regardless of supply. So, unlike most other commodities, the gold supply is likely to continue to be more reactive to its price than having a direct impact on it.
The demand side is equally consistent. As the price of gold falls, its demand for jewelry wear increases (since jewelry is a discretionary spending item), but investment demand for gold will generally fall as prices move in an upward trend. lowers it The opposite is true, of course, if prices rise: jewelry demand for gold falls and investment demand rises.
gold price future
Consider the economy and the inflation rate as the most likely indicators of the future gold price. Another big recession or a sudden increase in the level of inflation could send gold higher again. Similarly, if things continue to improve in the global economy and inflation is kept in check, gold prices are likely to remain fairly flat and could even fall a bit further.