In the present times, gold is one of the most popular metals in the market. It is a great option not just as an investment and for making jewelry, but it also has several use cases in the manufacturing sector where it is used to make certain electronic and medical devices. Around March 2021, trade gold online rates were well over $1,700 per ounce. This was at least $300 less from the rates in September 2020, yet remarkably up from being under $100 about 50 years ago. What are the factors that steer gold prices to peaks?
Global Uncertainty
The most important factor that catapults gold prices is global uncertainty. Political and geopolitical uncertainty can impact gold prices heavily. The Cold War and turmoil in the Middle East and West Asia caused one of the largest ever rallies in gold rates. This uncertainty and instability continue to be the leading factor for the rise in gold prices.
Central Bank Reserves
Central Bank monetary policy directly impacts gold prices. It is particularly true for major central banks such as the US Fed, the ECB, and the Bank of Japan. Whenever an investor like you invests in gold, they essentially let go of the interest that they might have pocketed had they bought any debt instrument. However, when the rates begin to fall, the opportunity cost is negligible which could cause a spike in gold demand.
Central banks maintain reserves for paper currencies and gold. Whenever these central banks begin to diversify their monetary reserves, shifting away from paper currencies and moving towards gold—the metal’s price inevitably rises. There are many nations around the world whose reserves are largely of gold.
Value of U.S. Dollar
Gold rates depend heavily on the U.S dollar. Gold prices are typically inversely related to the dollar’s value as the yellow metal is dollar-denominated. If everything is equal and stable, a stronger U.S. dollar would keep a check on gold rates, whereas if the U.S. dollar is weak, it is more likely to cause gold prices to increase in response to the spike in demand. This is because if the dollar is weak, one can purchase more gold.
Hence, experts also look at gold as a hedge against inflation. Inflation happens when the prices rise overall, and by the same token prices increase while the dollar's value falls. When the inflation rate is high, so is the gold rate.
Worldwide Demand
In 2019, the gold demand was dominated by jewelry, which made up nearly half of the overall gold demand. As per the estimates of the World Gold Council, the value came close to more than 4,400 tonnes. The market for gold jewelry in terms of volume is highest in India, China, and the U.S. Technology and industrial uses for gold account for 7.5% of the overall demand. In these industries, gold is used in the manufacturing of medical devices such as stents and precision electronics like GPS units.
In a nutshell, one could say that gold prices are also affected by the theory of supply and demand. When there is greater demand for consumer goods like jewelry and electronics, the gold rate also grows.
Wealth Protection
Economic growth in leading economies is another important factor that affects gold rates.
When there is economic uncertainty such as in a situation of recession, more people begin to invest in gold since its value remains stable. Gold is known to provide a safety net to investors when the times are testing. Even if the anticipated or actual returns on bonds, equities, and real estate decrease, the interest in gold investing could see an exponential rise which reflects on its price. Gold can turn out to be a great tool to hedge against economic events such as when the currency gets devalued or when there is inflation. Another important point is that gold is seen as a tool that protects one’s funds during periods of political instability.
Investment Demand
Exchange-traded funds (ETF), particularly the ones which hold the metal and issue shares that can be traded by investors, can also drive the demand for gold. SPDR Gold Trust (GLD) is the biggest ever ETF and held more than 1,078 tonnes of gold in March 2021. In all, gold purchases that came from different investment vehicles in 2019 were roughly 1,271.7 tonnes in volume if one goes by the estimates of the World Gold Council. This represents more than 29% of the total demand for gold.
Gold Production
Gold mining is dominated by China, South Africa, the United States, Australia, Russia, and Peru. Global gold production has a direct impact on gold prices, which is another example of supply meeting demand. Gold mine production was nearly 3,260 tonnes in 2018, which is a remarkable increase from 2,500 in 2010.
But it is worth noting that despite the increase over a ten-year span, since 2016, there has not been a considerable change in gold mining production. The top reason for this is that "easy gold" has already been mined and now miners need to dig even further to get access to quality gold reserves. Today, it is much more challenging to access gold and this leads to further problems. Miners work in much more hazardous situations, with additional hazards and the environmental impact is also more. Thus, today it costs more to get less gold. These further contribute to the costs of gold mine production, which can cause a spike in gold prices.
Bottom line
In the span of the last 50 years, two key fundamental trends have come to the surface when it comes to gold prices and what affects them. First and foremost, the gold value increases nearly always when the times are uncertain. Next, gold prices have always been inversely related to the value of the U.S dollar and the overall health of the U.S economy. Other than these two factors, there are other technical factors too but their impact on gold prices are more visible in the short to medium term. Visit forex - multibankfx